On September 9, 2016, Citibank’s London Branch filed a claim as collateral agent for the bondholders of New World Resources (NWR) with the High Court in Ostrava in the insolvency proceedings of OKD. OKD owns seven coal mines in the Czech Republic, employing over 13000 people. The low cost of coal and the refusal of the Czech Government to bail it out led to OKD filing for a Czech restructuring process in May 2016.
Citibank is seeking confirmation of its claim in the amount of 10.1 billion CZK which is €373.77m. Citibank’s claim has been rejected in the insolvency proceedings of OKD based on several grounds, one of them being an argument that the “parallel debt” does not create sufficient cause for it to claim payment on behalf of all bondholders. This is not the first time bondholders are having a hard time in Czech insolvency proceedings, although the legal arguments of the parties (trustee or borrower) differ in each case. The previous proceedings where big claims arising from bonds have been rejected were the bankruptcies of betting company Sazka and of ECM Real Estate Investments A.G.
NWR is the London-headquartered parent of OKD. In 2014, the NWR Group proposed a UK scheme of arrangement with the primary objectives of:
(a) mitigating the risk of any of the NWR Group companies (in particular NWR Group’s key operating subsidiary, OKD) having to file for bankruptcy; and
(b) implementing a new capital structure so that the NWR Group would possess a strengthened balance sheet and a more appropriate debt service and maturity profile in light of the ongoing difficult trading conditions in the global coal mining market.
Under the UK Scheme of Arrangement, OKD’s obligations as guarantor under the old senior secured notes were fully and finally released and OKD assumed the Guarantees. On 5 September 2014, a hearing took place before the UK High Court. During the proceedings, it was noted that the UK Scheme of Arrangement:
“would be recognised by the Czech court as a foreign judgment and/or as a settlement under the Brussels Regulation. Failing that, and as an alternative, the scheme would be recognised as a foreign judgment under the Czech Act”.
The UK High Court, taking into consideration the Guarantees, adjudged that the UK Scheme of Arrangement was fair and sanctioned this scheme in its judgment of 5 September 2014 (the “UK Court Order”).
On 9 September 2014, the United States Bankruptcy Court for the Southern District of New York recognised the UK Scheme of Arrangement as a foreign main proceeding pursuant to Chapter 15 of the US Bankruptcy Code. US Bankruptcy Judge Stuart M. Berstein adjudged that the UK Court Order, the UK Scheme of Arrangement and the restructuring documents (including the SSN and the SSCF pursuant to which OKD was released from the old guarantee and assumed the Guarantees), as applicable, are:
“recognised, granted comity, and entitled to full force and effect against all entities in accordance with their terms and that such terms shall be binding and fully enforceable.”
Citibank Claims against OKD
Citibank has filed two claims in the insolvency proceeding of OKD. The first one, in the amount of 9,530,033,808.09 CZK, arising under the Indenture €300m Senior Secured PIK Toggle Notes due 2020 dated October 7, 2014, under which NWR issued its notes (SSN Claim). OKD guaranteed the full payment of all obligations of the issuer. Citibank had a role of the security agent and based on its claim registration it seems that it filed the SSN Claim for all bondholders under the parallel debt clause.
The second claim in the amount of 621,273,214.79 CZK is arising under the €35m Super Senior Term Facility Agreement provided to NWR (SSFA Claim). Based upon Citibank’s claim registration, under Section 3.1 of the Facility Agreement, the loan should have been forwarded to OKD. Again, due to several alleged defaults, the entire loan was accelerated and Citibank claims the payment of full amount from OKD as a guarantor. Also here Citibank acted as the Security Agent.
Both claims were refused by OKD as well as the insolvency trustee, although their grounds for refusal were not identical.
OKD refused the SSN Claim arguing that:
- Citibank based its claim on the parallel debt concept, however, such concept does not establish grounds for the claim and thus, is in conflict with public order international private law principle;
- NWR forced OKD to guarantee its obligations;
- The Guarantee has not been duly signed on behalf of OKD and there was a conflict of interest present; and
- Czech law did not allow the Guarantee in the amount of the SSN Claim.
OKD’s arguments under 2. and 3. were repeated also with respect to SSFA Claim.
The Trustee rejected both claims based on slightly different arguments. His arguments are
- The debts secured by the Guarantees do not exist;
- NWR forced OKD to assume obligations as guarantor of the Guarantees;
- The Guarantees were not duly and properly agreed and executed by OKD; and
- No consideration for the Guarantees was provided.
It is not yet known whether the High Court in Ostrava will ultimately allow or reject Citibank’s claims in the OKD restructuring. However, this case will alarm international investors lending to companies in the Czech Republic and international lawyers who believed that the UK scheme of arrangement would be recognised in the Czech Republic.