The British may have earned a reputation for being sticklers as opposed to their sometimes more freewheeling American counterparts, but for third-party releases in bankruptcy proceedings, it’s the Brits who can now claim to have more flexibility.

That distinction became much more significant to bankruptcy practitioners after a recent opinion issued on April 9 by a U.S. Bankruptcy Court in the Southern District of New York. The ruling set a legal precedent that could lead to more work for law firms with transatlantic bankruptcy practices.

In the 26-page opinion written by U.S. Bankruptcy Judge Martin Glenn, a federal court recognized U.K. court-sanctioned releases provided by affiliates of Avanti Communications Group plc. The London-based satellite service company is being represented as a debtor in U.S. courts by Milbank, Tweed, Hadley and McCloy financial restructuring partner Peter Newman.

The releases recognized by Glenn gave Avanti affiliate guarantors an exit option from their guarantees. They were initially approved as part of a British legal proceeding called a “scheme of arrangement,” which is somewhat analogous to a U.S. bankruptcy case.

Glenn issued his opinion in Avanti’s Chapter 15 case—one of the least-known types of bankruptcies, added to the U.S. code in 2005, and which allows foreign debtors access to U.S. bankruptcy courts to execute an administration of assets. Glenn’s opinion represents a “green light” for debtors to pursue schemes of arrangement in U.K. courts and then get them recognized by U.S. courts, said New York-based Arent Fox bankruptcy partner George Angelich, who has written recently about the ruling.

That possibility is particularly ripe for debtors seeking third-party releases, since disagreements persist among U.S. appellate courts about approving such releases. The Avanti decision “will enable Chapter 15 foreign representatives to pursue non-consensual, third-party releases approved without the uncertainty and litigation that frequently occurs in Chapter 11 proceedings,” Angelich said.

With his opinion, Glenn accepted the U.K. court sanctioned “scheme of arrangement” and offered a clear message that a U.S. bankruptcy court will grant comity, or mutual recognition of judicial acts, in the traditional U.S. bankruptcy context.

“The U.S. bankruptcy proceeding in the Avanti case was unopposed and so the limits of the Avanti decision may depend on due process concerns and the actual extent to which the foreign proceeding diverges from U.S. policy interests,” Angelich added.

Stephen Zide, a bankruptcy partner at Kramer Levin Naftalis & Frankel in New York, also wrote last month about Glenn’s ruling in the Avanti case.

Stephen Zide

“It’s definitely an interesting tool,” he said. “Although there have been many unpublished decisions that preceded the Avanti opinion on the subject of U.K. schemes of arrangement, this is the first reported decision by a U.S. Bankruptcy Court recognizing a U.K. scheme of arrangement and therefore an important legal precedent for the Chapter 15 practitioner,” added Zide in his post about Glenn’s opinion.

But only a narrow set of circumstances will allow for the use of options created by Glenn’s opinion, Zide said.

“This is most helpful in situations where you are trying to deal with financial debt and where you are trying to eliminate guarantees at affiliate entities and you want to avoid putting the affiliate entities into insolvency proceedings,” he added.

Across the pond, a barrister and veteran bankruptcy counselor welcomed the new opportunities created by Glenn’s recent ruling.

“I do think this is a considerable advantage over the U.S. position where third-party releases are needed and good for legal work in England!” wrote Gabriel Moss, a barrister at London’s South Square, in an email. Under a U.K. scheme of arrangement, Moss said that technically there is no direct release of the third-party, but a contractual obligation on creditors not to sue the third party, which is re-enforceable.

“Sometimes the debtor agrees to hold the benefit of the obligation not to sue the third party on trust for the creditors as a whole, so it can be enforced by pro-release creditors if the debtor fails to act,” Moss wrote. “The need and use of third-party releases relates usually to situations where if you release the debtor or modify its obligations but do not do the same to the guarantor, then when the guarantor is sued, he would have a right of indemnity against the debtor, thus undermining the restructuring of the debt.”

Third-party releases are “part of the great flexibility of schemes,” Moss said, and represent “helpful case law created by judges who are very experienced in restructuring cases.”

And what type of clients could be able to take advantage of the new opportunities created by Glenn’s opinion in the Avanti case?

“Anybody who has the ability to file insolvency proceedings in the U.K. and wants to hedge against the risk of future lawsuits in the U.S.,” said Arent Fox’s Angelich.