19 Entertainment Ltd, Re

This is an application made by 19 Entertainment Limited (“the Company”) and its directors, Mr. Scott Frosch, Mr. Peter Hurwitz and Ms. Kelly Pontano, whereby they, as applicants, seek, first, recognition of Chapter 11 Bankruptcy proceedings, commenced in the early hours of yesterday morning in the Bankruptcy Court for the Southern District of New York as foreign main bankruptcy proceedings under Art.17 of sch.1 to the Cross-Border Insolvency Regulations 2006 (“the 2006 Regulations”) and, secondly, discretionary relief pursuant to Art.20 and/or Art.21 of the schedule to the 2006 Regulations, substantially in the form of a moratorium in the terms of para.43 of sch. B1 to the Insolvency Act 1986 (“the 1986 Act”).

The Company is part of a group of companies of which the ultimate parent company is CORE Entertainment Holdings Incorporated (“CORE”), which is incorporated under the laws of the State of Delaware. The group of companies of which CORE is the ultimate parent company, is in the business of owning, producing, developing, and commercially exploiting entertainment content. It has, amongst its brands, a number of apparently well-known television series.

The Company is part of the 19 Entertainment Business Division of the CORE group of companies (“the CORE Group”) and operates in and primarily from Los Angeles in California. The Company has, since October of 2010, though registered in London and with a registered office here, transferred its business and operations to Los Angeles.

As will become apparent from what I mention later in this judgment, for the purposes of the present application, it is necessary to identify the centre of main interests for the company (“COMI”). From the evidence of Mr. Frosch, set out in an affidavit before me, it is very clear that, although the registered office of the company is in London, at New Bridge Street, it is, in fact, the paradigm case of a letterbox company because its business, direction and operation is now entirely conducted in the United States of America and, in particular, in Los Angeles. It has closed down, as I mentioned a moment ago, its London office; its directors are United States citizens and are resident there. Its board meetings are held in the United States. The Company’s website, or rather that of the group to which it belongs, makes it clear that it is a Los Angeles-based concern with a Los Angeles telephone number. Further, the major creditors of the company are in the United States and its business dealings are also conducted there, as is its banking.

It is clear from the decision of the Court of Appeal in Stanford International Bank Limited [2011] 1 Ch 33 that, in deciding issues as to COMI for purposes of the UNCITRAL Model Law, which is given effect in English law by the 2006 Regulations, I am to apply the test promulgated by the European Court of Justice in the case of Eurofood IFSC Limited [2006] Ch 508. The effect of this decision is that, under the European Council Regulations on Insolvency Proceedings, there is a rebuttable presumption that the registered office is the company’s COMI; see the judgment of the European Court at paras 34 and 35, which are in the following terms:

“34.

It follows that, in determining the centre of the main interests of a debtor company, the simple presumption laid down by the Community legislature in favour of the registered office of that company can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at that registered office is deemed to reflect.

“35.

That could be so in particular in the case of a ‘letterbox’ company not carrying out any business in the territory of the Member State in which its registered office is situated.”

The evidence in this case, which is contained in the affidavit of Mr. Frosch, extends to material provided from a number of creditors, each of whom has confirmed that they understood the COMI of the Company to be in the United States. In my judgment, the fact that its COMI is situated in that country is extremely clear and I shall approach this case on that basis.

The Company’s financial difficulties are considerable. It has many liabilities, including a secured guarantee liability for $200 million. That is referred to in the evidence as the ‘First Lien Debt.’ There is a further secured guarantee liability of $160 million, referred to in the evidence as the ‘Second Lien Debt.’

There are other unsecured liabilities to other companies within the CORE Group of about $190 million, and there are liabilities also to a Mr. Simon Fuller who figures in the evidence in this case. It is not necessary for me to refer to his position in any great detail, save to say that Mr. Fuller is owed by the Company just under £3 million, under a consultancy agreement dated January 2010. What is material to this application is that Mr. Fuller has served a statutory demand upon the Company, and the circumstances are now such that if that demand is not satisfied pretty much forthwith, on Tuesday of next week, Mr Fuller would be in a position to present a petition to wind up the Company. There is, therefore, a degree of urgency in this application which is before me, which is why it has come on at very short notice and extremely soon after the commencement of the Chapter 11 Bankruptcy proceedings to which I have referred already.

The Chapter 11 proceedings concern not only the Company but other entities within the CORE Group. There is before me an expert report from Mr. Mathew Feldman, an attorney qualified to practice in several United States jurisdictions, including New York. He explains, at para. 18 of his report, the purpose of Chapter 11 Bankruptcy proceedings as follows:

“The purpose of commencing a chapter 11 case such as the Chapter 11 Proceeding is to implement a reorganisation under the bankruptcy laws of the United States. The primary goal of chapter 11 of the US Bankruptcy Code is to reorganise the business of a company in financial distress in order for the company to survive and emerge from the chapter 11 proceedings as a going concern. Chapter 11 can also be utilised to sell the debtor’s business on a full going concern basis in order to realise value for its creditors. If it is not possible to rescue the debtor, chapter 11 can also be utilised to liquidate or sell the debtor’s assets for the benefit of its creditors as part of the plan, including pursuant to s.363 of the US Bankruptcy Code which provides that the trustee or debtor in possession: “after notice and a hearing, may use, sell or lease (other than in the ordinary course of business) property of the estate ...” However, s.1129(a)(11) of the US Bankruptcy Code (in listing one of the requirements to be satisfied in order to confirm a plan of reorganisation) requires that “confirmation is not likely to be followed by any liquidation or the need for further financial reorganisation of the debtor ... unless such liquidation or reorganisation is proposed in the plan.” The Chapter 11 Proceeding is accordingly a proceeding for the purpose of reorganisation of the company as a going concern, or liquidation but only if the rescue of the company cannot be achieved.”

In light of Mr. Feldman’s evidence, it is, therefore, clear that Chapter 11 Bankruptcy is broadly equivalent to the administration order régime applicable in England under the 1986 Act. The purpose of the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law, to which English law gives effect through the 1986 Regulations, is helpfully stated in the UNCITRAL Model Law Cross-Border Insolvency Guide to Enactment. Para. 21(b) of the Guide states as follows:

“The Model Law presents to enacting states the possibility of aligning the relief resulting from recognition of a foreign proceeding with the relief available in comparable proceeding under the national law.”

In other words, the effect of the Model Law is to give to the English court the possibility of enabling the position of a company which is in Chapter 11 Bankruptcy in the United States, to be put on a similar footing in England with regard to any action against it by creditors, such as it would be if proceedings were being conducted in the United States. As Mr. Robins, counsel for the applicants, helpfully put it in the course of his admirably clear submissions this morning, the scheme laid down by the 1986 Regulations is not to import American law into England, but rather to enable proceedings to be conducted in relation to insolvency matters in England on a footing comparable to the footing under which the matter would be dealt with if being dealt with in the United States.

Article 20 of the Model Law provides for an automatic stay upon recognition of the foreign main proceedings of individual actions by creditors. Under Art.21, the court can grant appropriate relief which goes beyond the automatic relief conferred by Art.20 and, in particular, Art.21(1)(g) enables the court to grant any additional relief that may be available to a British insolvency office-holder under the law of Great Britain, including any relief provided under para.43 of sch. B1 of the 1986 Act; in other words; relief equivalent to that which would be applicable upon an administration order being made in respect of a company. The relief takes the form of a moratorium in administration which would prevent the presentation of a winding up petition and, indeed, an application for the company to be put into administration.

Before I can grant any such relief, however, I must be satisfied that the Chapter 11 proceeding should be recognised in England. Under Art.17 of the 1986 Regulations, I must recognise the Chapter 11 Proceeding in certain circumstances, that is to say if I am satisfied that the foreign proceedings, the Chapter 11 proceedings, amount to a foreign proceeding, falling within the definition of para. 1 of Article 2 of sch. 1 to the 1986 Regulations; secondly, if the applicants are foreign representatives within the meaning of sub-para.(j) of Article 2 of sch. 1; thirdly, if the application satisfies the evidential requirements of paras. 2 and 3 of Article 15 of sch. 1 and, finally, if the application has been submitted to the court referred to in Article 4 of sch. 1. I shall take these matters in turn.

First, are the proceedings before the court in New York ‘foreign proceedings’ for the purposes of the 1986 Regulations? Article 2 of the schedule defines the term ‘foreign proceeding’ to mean a collective judicial or administrative proceeding in a foreign state pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court for the purpose of reorganisation or liquidation. The evidence of Mr. Feldman, to which I have referred already, and it is not necessary for me to refer more fully on this point to the body of his report, persuades me completely that the proceedings are ‘foreign proceedings’ within the meaning of the 1986 Regulations.

The next question is whether the applicants are ‘foreign representatives.’ Sub-paragraph (j) of Article 2 of sch.1 of the Regulations defines the term ‘foreign representative’ to mean a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding.

Under s.1107 of the US Bankruptcy Code, a debtor in possession shall have all the rights and powers and shall perform all the functions and duties of a trustee serving in a case under that Chapter. This is a point to which Mr. Feldman speaks in para. 20 of his report and, further, he says, at para. 22:

“A debtor in possession has broad rights, powers and duties pursuant to the US Bankruptcy Code, which are equivalent to those a trustee that could be appointed to oversee the debtor’s affairs would have (with the exception of the remuneration of the trustee). Appointment of a trustee in chapter 11 cases is limited pursuant to s.1104(a) of the US Bankruptcy Code, which allows for the appointment of a trustee “(1) for cause, including fraud, dishonesty, incompetence or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case or similar cause ... , or (2) if such appointment is in the interests of creditors, any equity security holders and other interests of the estate ...” and is the exception in practice. The continuation of the debtor in possession to operate and manage the business of the debtor during the bankruptcy proceeding under chapter 11 of the US Bankruptcy Code is the norm.”

In the circumstances, I am satisfied that the applicants are ‘foreign representatives’ of the foreign proceeding. I am so satisfied on the basis of the evidence that I have seen. I add that there is specific provision under Chapter 11 of the Bankruptcy Code in the United States to the effect that, upon the making of an application under the Code, an order of the court is deemed to have been made. It seems to me that it is at least arguable that, in those circumstances, the persons concerned have been appointed representatives of the company and for the purposes of the foreign proceeding. It is not strictly necessary for me to decide that because I am satisfied on the other evidence to which I have referred that such an appointment has been duly made.

I turn, thirdly, to the evidential requirements. These I have mentioned already in this judgment and it is not necessary for me to refer to the evidence further for the purpose of establishing that I am satisfied that the evidential requirements have been satisfied fully.

Finally, I have to consider whether this is the appropriate court. I am so satisfied because the court which is referred to in Article 4 is the Chancery Division, provided that the Chancery Division considers that it is the appropriate forum to consider the question or provide the assistance requested. I have no hesitation in saying that I am so satisfied. In those circumstances, I consider that I am bound to recognise the proceedings.

I turn then to the question of discretionary relief. As I have explained already, there is a degree of urgency in the matter which is now before me, in the light of Mr. Fuller’s position and in the light of his entitlement, within a matter of days, to commence winding up proceedings. If discretionary relief were to be granted, he would not be able to take that step, nor would other creditors. In my judgment, it is entirely consistent with the policy behind the adoption of the Model Law that I should grant relief of a kind which is similar to the moratorium relief provided in para. 43 of sch. B1 of the 1986 Act.

Mr. Robins took me to a number of authorities where other judges have made similar orders in these circumstances. The decision of Morgan J in Samsun Logix Corporation [2009] EWHC 576 (Ch) is one example and I refer also to the decision of Norris J in the case of Pan Oceanic Maritime Incorporated [2010] EWHC 1734 (Comm).

I propose to adopt the form of order that was made by Norris J in that case, where the order which he made set out a single code regulating the effect of the order so that it was not necessary for those considering the order to apply their minds both to what the effect of automatic relief would be, on the one hand, and, on the other hand, what the effect of discretionary relief would be. Mr. Robins has put before me a draft order which I propose to make, subject to any further minor modifications it might be necessary to consider when I have concluded this judgment.

I turn to the matter of service, which I can deal with briefly. Under para. 21 of sch. 2 to the Regulations, unless the court otherwise orders, the application is to be served on a specified group of persons. Having considered the evidence, I am satisfied that the only person or persons to whom those provisions apply fall within sub-para. (h) of that provision and that is any person who, to the knowledge of the foreign representative, is or may be entitled to appoint an administrator of the debtor under para.14 of sch.B1 to the 1986 Act.

The position is this: the only person actually in a position to make such an appointment is the administrative agent in respect of the First Lien Debt and the administrative agent has, by e-mail, which is before me now, confirmed that it waives any right or entitlement to be served in respect of the recognition application. That e-mail is not formally at this moment in evidence, but the applicants’ solicitors have given an undertaking to lodge with the court an affidavit exhibiting that e-mail confirmation. Any question of service has thus been satisfied fully.

I should add also, for the sake of completeness, that Mr. Fuller is represented today by counsel who does not object to the making of the order that I intend to make. In all these circumstances, I shall grant the applications in the terms sought.