ThinkstockPhotos-454037465Chadbourne & Parke LLP currently represents the English liquidators of Hellas Telecommunications (Luxembourg) II SCA, a company that formerly owned one of the largest mobile phone operators in Greece. On behalf of the English liquidators, in 2012 Chadbourne obtained an order from the US Bankruptcy Court from the Southern District of New York granting Chapter 15 recognition of Hellas II’s liquidation proceeding. In March 2014, on behalf of the English liquidators, Chadbourne filed a lawsuit in the New York bankruptcy court asserting New York fraudulent transfer law and unjust enrichment claims and seeking the recovery of approximately €1 billion that was siphoned out of Hellas II as part of a dividend recapitalization by, among others, private equity giants TPG Capital Management and Apax Partners. Following the bankruptcy court’s dismissal of the New York law-based fraudulent conveyance claims, Chadbourne, on behalf of the liquidators, requested leave to file an amended complaint to assert, in addition to a surviving unjust enrichment claim, a fraudulent transfer claim under section 423 of the UK Insolvency Act, a fraudulent trading claim under section 213 of the UK Insolvency Act, and, in the alternative, a fraudulent transfer claim under Article 1167 of the Luxembourg Civil Code and Article 448 of the Luxembourg Commercial Code. Ultimately, the bankruptcy court authorized the liquidators to assert their English law claims (in addition to the surviving New York law unjust enrichment claim), clearing the way for the liquidators to move ahead in seeking recovery from TPG, Apax, and others.

Section 423 of the Insolvency Act allows an English liquidator to recover “transactions entered into at an undervalue”–the approximate equivalent of an actual fraudulent conveyance claim under New York law. The defendants argued that the liquidators should not be permitted to pursue the section 423 claims, arguing that English law only permitted the liquidators to pursue such a claim in a court with jurisdiction to wind up Hellas II (which, according to the defendants, did not include the bankruptcy court). The bankruptcy court rejected that argument, finding that any purported English law restriction on where the claim should be brought was merely English procedural law and did not limit the bankruptcy court’s ability to apply English substantive law. To the contrary, the bankruptcy court concluded that “applicable federal law—not section 423(4) of the Insolvency Act—dictates whether the Court lacks subject matter jurisdiction over the Section 423 Claim and whether venue is proper.” Because the English liquidators brought the litigation by filing a complaint with the bankruptcy court in connection with a Chapter 15 case, the court found that the claims are “related” to a case under the Bankruptcy Code and that venue is proper in New York.

The bankruptcy court also relied on the Cross-Border Insolvency Regulations 2006 (the “CBIR”), which is the UK’s equivalent of Chapter 15, finding that the CBIR would trump any English statutory jurisdictional limitations, and prevents a result where English liquidators could not recover avoidable transfers against parties outside of the UK over whom a UK court may not possess personal jurisdiction. In finding that it could grant relief under the English law fraudulent conveyance statute, the bankruptcy court also considered the interplay between the CBIR and Chapter 15 of the Bankruptcy Code, finding that the CBIR “contemplates a foreign court providing assistance to a UK court ‘where assistance is sought in connection with a proceeding under British insolvency law’“ and further noting that “Chapter 15 expressly provides that the foreign representative may be entrusted with the ‘realization of all or part of the debtor’s assets in the United States.’“

In addition, the bankruptcy court found that the liquidators adequately pled Section 213 fraudulent trading claims, which imposes liability on knowing participants in any business of a debtor that was carried on with the intent to defraud creditors or any other person:

The First Amended Complaint alleges facts giving rise to the strong inference that Hellas II carried on business with the intent to defraud its creditors when it executed the December 2006 CPEC Redemption and the Consulting Fees Transfer. For instance, the First Amended Complaint alleges that Hellas II carried out the December 2006 CPEC Redemption “in knowing disregard of the fact that [Hellas II] was insolvent or would be rendered insolvent thereby, and of the foreseeable disastrous consequences for [Hellas II] and its creditors, and in particular the holders of the Sub Notes . . . .”) Hellas II’s intent to defraud creditors through this transaction is further supported by the allegation that the December 2006 CPEC Redemption “was made without fair or adequate consideration because the CPECs were redeemed at a premium of €951.3 million over their aggregate par value.” Moreover, Hellas II allegedly fixed the redemption price for the transaction “without a good-faith, arm’s-length determination of market value” and without obtaining an independent appraisal. Additionally, Hellas II allegedly consummated the December 2006 CPEC Redemption and the Consulting Fees Transfer to the detriment of its creditors and “in knowing disregard of the fact that TPG and Apax would improperly benefit” from such transactions.

Further the court found that the English liquidators had sufficiently pled that TPG and Apax were knowing parties to the transactions.

Accepting all the alleged facts as true, the Court concludes that the First Amended Complaint pleads facts giving rise to the strong inference that each of the TPG Defendants had the requisite scienter to support liability under section 213 of the Insolvency Act. While TPG’s active participation in the December 2006 Transaction was primarily taken through the actions of non-party TPG Europe’s employees, TPG Capital and TPG Europe share a unified management. Moreover, the TPG Defendants against whom the Section 213 Claim is asserted include TPG Capital, its founders and top executives, and entities they wholly own and control. The December 2006 Transaction was allegedly submitted to these ultimate decision makers for approval and received their blessing, notwithstanding that concerns regarding the quantum of debt involved in the transaction and the “crisis and setback [that needed] to be absolutely avoided” were shared with one of TPG Capital’s co-founders. These shared concerns raise a strong inference that the TPG Defendants’ top brass had a factual basis to” suspect that Hellas II was carrying on business with a fraudulent purpose through the December 2006 Transaction, but the TPG Defendants turned a blind eye to this suspicion. Consequently, the Court concludes that the First Amended Complaint adequately pleads a Section 213 Claim against the applicable TPG Defendants.

Notably, the bankruptcy court also rejected defendants’ argument that it should, based on principles of international comity, abstain from considering the foreign law claims. Applying the plain language of section 1334(c)(1) of title 28 of the United States Code, the bankruptcy court concluded that it could not permissibly abstain from hearing a Chapter 15 case or any matters related to it, including the claims raised in the liquidators’ adversary proceeding a complaint asserting English law and New York common law claims.

Following the bankruptcy court’s ruling, the liquidators filed their amended complaint, which is available here.

The Chadbourne team representing Hellas II’s liquidators is led by Howard Seife, John Verrill, Andrew Rosenblatt, Marc Ashley, Robert Kirby and Eric Daucher.