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Case Study: Restructuring Systemically Important, Multinational Agrokor D.D.

On April 1, 2019, the signs and flags in an industrial area of Zagreb, the capital of Croatia in the South-East of Europe, turned from red to green; the old Agrokor letters on red background were replaced by the new green logo of the Fortenova Group. The date marked the successful end of a restructuring that had shaped the economic, political, and social landscape of Croatia and the surrounding region in the two years following the company’s entry into “extraordinary administration” on April 7, 2017.

Agrokor was the largest privately owned company in Croatia. The group employed about 53,000 people across 20 countries, the majority of whom were based in Croatia and neighboring states, contributing significantly to the regional economy. The group comprised more than 150 entities across the food industry in a vertically integrated, farm-to-table structure. The entities covered agriculture, food production, and retail, the latter of which included a number of market-leading supermarket chains. Because of Agrokor’s significance as a major employer and food producer/supplier/retailer, a resolution to its financial troubles was of critical importance to the Central and Eastern Europe (CEE) economy.

The EA Law

When it became apparent that such a systemically important company as Agrokor faced insolvency in early 2017, Croatia’s lawmakers devised and enacted an emergency law in April 2017, the Law on Extraordinary Administration Proceedings for Companies of Systemic Importance (EA law), to cater to the group’s inevitable restructuring. The EA law provided an alternative to Croatia’s bankruptcy regime, thereby enabling the group to avoid insolvency and instead to effect a holistic restructuring.

On April 8, 2017, an extraordinary administrator, a role akin to an insolvency trustee, was appointed by the Zagreb commercial court to conduct the proceedings in respect of Agrokor. Upon commencement, the EA proceedings automatically extended to all Croatian group entities in which Agrokor had a stake of 25% or more. The administrator’s mandate was to reach an agreement with the group’s creditors to restructure Agrokor’s liabilities and enable the continuing operation of the group’s businesses.

This agreement would be documented by way of a settlement plan, not dissimilar to a U.S. Chapter 11 plan of reorganization or a German law Insolvenzplan, and was to be agreed to by the group’s creditors within 18 months, failing which the group would file for insolvency proceedings. The settlement plan— which provided for a comprehensive restructuring of the secured and unsecured liabilities of the group entities subject to the EA proceedings—received the approval of an overwhelming majority of more than 80% of all admitted claims in July 2018, following which all assets were transferred to the new Fortenova Group structure. The settlement plan took effect on April 1, 2019.

The EA law, while untested, proved capable of addressing the scale and complexity of the situation across numerous legal entities. Crucially, the EA law enabled the group to meet its immediate funding needs during the restructuring. Upon entering extraordinary administration, the group’s access to cash was extremely limited. However, the EA law provided that Agrokor and other group entities subject to the EA proceedings could grant super-senior security over previously pledged assets to enable the provision of more than 500 million euros of new money in June 2017 (SPFA).

Creditors were incentivized to participate in the SPFA by allowing them to refinance their prepetition debt on a ratio of 1:1 and on a super-senior basis (similar to a Chapter 11 roll-up). This feature was unsuccessfully challenged in the Croatian courts. Crucially, as a result of the new funding, the group was able to make payments to certain prepetition creditors, the majority of which were small suppliers whose businesses’ survival relied on receiving those payments at that time and on their continued relationship with the group.

An important step to implementing the terms of the settlement plan included the transfer of the SPFA to the new Fortenova Group. This was achieved by amending and novating the SPFA, which was effected by way of an English scheme of arrangement. The scheme was approved by 99.9% of creditors voting at the scheme meeting and was sanctioned by the English court on February 28, 2019.

Other notable features of the Agrokor group restructuring included:

  • Asset and liability transfers and the transfer of public permits for more than 40 legal entities, which were particularly relevant for a group operating across a number of regulated areas

  • The creation of a new holding structure for the restructured group incorporated in the Netherlands, originally set up as an orphan structure and upon implementation held by the new creditors

  • Material equitization of prepetition debt consisting of a number of different debt instruments (secured loans, bonds, guarantees, unsecured trade debt) under various governing laws (among the relevant jurisdictions of England and Wales, New York, and Croatia), deleveraging the entities across the group and reducing interdependencies within the group

  • Calculation of individual distributions to each creditor under an entity priority model based on the relevant debtors’ assets and liabilities, and applied to the overall value of the group. The entity priority model calculated the portion that each equitized creditor would receive in the new equity and newly issued subordinated debt of the Fortenova Group

  • The involvement of the creditors’ committee representing various types of lenders (including secured and unsecured financial creditors and suppliers) and the Croatian court in the proceeding and international recognition of the extraordinary administration

A key component to the successful implementation of Agrokor’s restructuring was international recognition of both the extraordinary administration proceedings and the settlement plan to minimize the risk of potential challenges to the proceedings brought outside Croatia.

U.K. Proceedings

Proceedings were initiated in the U.K. in 2017 to seek recognition of the extraordinary administration proceedings under the Cross-Border Insolvency Regulations 2006 (CBIR). Recognition was granted in November 2017, in the first-ever contested application for recognition under the CBIR.

One of Agrokor’s largest creditors opposed the recognition application on two main grounds:

  • That the extraordinary administration proceeding was not a “foreign proceeding” within the meaning of that term in the CBIR on the basis that, among other things, it was not a “law relating to insolvency”

  • That even if the extraordinary administration proceeding was a “foreign proceeding,” recognition would be manifestly contrary to the English public policy, including requirements that:

  • An insolvency proceeding accord creditors pari passu treatment within an insolvency proceeding

  • Creditors should have a right to object to the compromise of their rights in an insolvency proceeding

    The judge rejected both arguments and held, among other things, that:

    • A proceeding could be conducted pursuant to a “law relating to insolvency” where insolvency was just one of the grounds on which the proceeding could be commenced, even if insolvency need not necessarily be demonstrated. The judge also noted that the fact that a subsidiary or affiliate which was not insolvent may be joined to the proceeding did not mean that the proceeding was not brought under a “law relating to insolvency,” nor did the fact that the test for proving insolvency could easily be met mean that the law is not a “law relating to insolvency”

    • There was no violation of English public policy, let alone a “manifest” violation, in merely recognizing the extraordinary administration proceeding as a foreign main proceeding within the CBIR. The judge noted, in particular, that:

    • The fact that the priorities of the extraordinary administration proceeding in reorganizing or liquidating a company were different from those which would apply under English law was not sufficient to establish a “manifest violation” of public policy

    • Although there was no right in the EA law for creditors to object to the settlement agreement, there was nevertheless a right of appeal1

    Chapter 15

    On July 12, 2018, shortly after obtaining approval by the Croatian court of the settlement plan, Agrokor filed for recognition under Chapter 15 of the U.S. Bankruptcy Code.

    After multiple hearings and months of deliberation, U.S. Bankruptcy Judge Martin Glenn of the Southern District of New York on October 24, 2018, entered an initial order recognising the Croatian proceedings as foreign main proceedings—the first time any Croatian proceeding had received Chapter 15 recognition—and reserving for further consideration the express recognition of the terms of the settlement agreement related to Agrokor’s English-law-governed debt.2

    The U.S. court deferred its decision regarding Agrokor’s English debt out of initial deference to the Gibbs rule under English law, a common-law principle dating to 1890 that generally restricts recognition of the discharge or modification of debt except in accordance with the law of the underlying contract (certain of Agrokor’s debt was governed by English law). Notably, as all Agrokor’s creditors submitted to the Croatian proceedings, strictly speaking the rule in Gibbs was not engaged, as an English court would consider all creditors bound by the settlement plan in accordance with English private international law.

    Ultimately, the U.S. court resolved any concerns regarding the Gibbs rule with an extended critique finding that the territorialism of the rule was incompatible with modern international insolvency law and the modified universalism favored by the UNCITRAL Model Law (as adopted by the U.S. in Chapter 15 of the Bankruptcy Code). In light of the policies underpinning the Model Law and Chapter 15, Glenn explained that the Gibbs rule offered no legitimate reason to decline to recognize Agrokor’s settlement agreement in the U.S.

    While the U.S. court’s holding applied only to recognition and enforcement of Agrokor’s settlement agreement, the opinion signals that the Gibbs rule should not be an obstacle to the enforcement of foreign insolvency rulings in the U.S. The decision will be influential on other courts (both in and outside the U.S.) and provide a helpful road map to stakeholders in applying comity principles in international insolvency law.

    Extraordinary administration under the EA law has since been added to Annex A of the Recast Insolvency Regulation (EU) 2015/848, in July 2018. Accordingly, any future such proceedings opened in the debtor’s center of main interests will be entitled to automatic recognition across all EU member states.

    Key Takeaways

    Key takeaways from the Agrokor restructuring include:

    • Modern restructuring laws can provide the required legal framework to rescue complex, systemically important, multijurisdictional organizations under a more integrated corporate group approach, ultimately benefitting the recoveries of all lenders.

    • To function efficiently, the relevant legal framework must permit the management and implementation of an immediate stabilization of the business (a stay on claims, access to new money, etc.). This then sets the platform for a large and complex restructuring without unnecessarily disintegrating the group at an early stage in the process.

    • International recognition is key for the effective protection of a multinational debtor group which is financed on international capital markets and which is undergoing an extensive cross-border financial restructuring. The key jurisdictions for international financing (England and Wales, New York) can successfully handle the recognition if the required conditions are met even of untested restructuring tools.

    • The English law rule in Gibbs may not be an obstacle to recognition of foreign restructuring plans in the U.S.

    Kate Stephenson, a restructuring partner in the London office of Kirkland & Ellis International LLP, contributed to this article. Other constructive input was provided by lawyers across the involved Kirkland & Ellis offices in the U.S., London, and Munich.

    1. Re Agrokor d.d. [2018] BCC 18.
    2. In re Agrokor d.d., No. 18-12104 (Bankr. S.D.N.Y. Oct. 24, 2018) (MG).
    Wolfram Prusko

    Dr. Wolfram Prusk

    Kirkland & Ellis International LLP

    Dr. Wolfram Prusko is a restructuring partner in the Munich office of Kirkland & Ellis International LLP. His practice is focused on the representation of investors, debtors, and creditors with respect to cross-border acquisitions, restructurings — particularly financial and bond restructurings — and insolvency proceedings. He also has extensive experience in international bank restructuring. IFLR1000 recognized him as a “highly regarded” lawyer for restructuring in 2018 and 2019. Prusko is initiator and co-chair of TMA NextGen Germany.

    Brad Weiland

    Brad Weiland

    Kirkland & Ellis International LLP

    Brad Weiland is a restructuring partner in the Chicago office of Kirkland & Ellis LLP. He has represented debtors, lenders, and investors in restructuring matters involving financially troubled companies. His practice includes advising clients with respect to operations in Chapter 11, advising senior management of distressed companies with respect to in- and out-of-court restructurings and contingency planning, and negotiating and structuring financings and other commercial transactions. Weiland was recognized by IFLR1000 in 2019 as a “Notable Practitioner.”

    Hannah Crawford

    Hannah Crawford

    Kirkland & Ellis International LLP

    Hannah Crawford is a restructuring associate in the London office of Kirkland & Ellis International LLP. Her restructuring and insolvency experience extends to advising debtors, creditors, and strategic investors on restructurings of stressed and distressed businesses. Crawford’s recent transactions include advising Noble Group Limited, an ad hoc committee of secured creditors to CGG S.A., and Agrokor d.d.. She is currently representing an ad hoc group of bondholders in the restructuring of Debenhams.

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