U.S. Bankruptcy Court Agrees to Enforce English Three-Step, with Third-Party Releases, Used by Mexican Auto Financer

The English Three-Step
Operadora de Servicios Mega, S.A. De C.V., Sofom, E.R. (Operadora), based in Guadalajara, Mexico, provides automobile financing services. In 2024, Operadora undertook a process to restructure $351 million in debt governed by New York law (U.S. Notes and the U.S. Notes Facility), but it could not obtain the consent of (and releases from) 100% of the noteholders. Apparently assuming it could not obtain such restructuring relief in the United States under chapter 11, Operadora turned, instead, to England.

First, Operadora created a shell subsidiary (Mega Newco Limited) in England and under English law (Mega Newco).

Second, Operadora orchestrated a transaction whereby Mega Newco (1) became a new borrower under the U.S. Notes Facility and (2) agreed that 50% of any payments made by Operadora on the U.S. Notes would be reimbursed by Mega Newco. The effect rendered Mega Newco a principal borrower under, and Operadora a guarantor of, the U.S. Notes Facility.

Third, on November 14, 2024, Mega Newco (alone) commenced a formal English financial restructuring process (referred to as a “scheme”) under Part 26 of England’s Company Act 2006. The scheme sought to modify the U.S. Notes Facility by providing options to the noteholders to (1) convert debt into equity of Mega Newco or receive cash at 45% of the par value of the U.S. Notes, and (2) advance new money to Mega Newco. While not a debtor in any proceeding in England (or elsewhere), the scheme provided Operadora a release from the U.S. Notes Facility, one that would be consensual for noteholders voting in favor of the scheme and apparently non-consensual for noteholders not voting in favor of the scheme, including those who did not vote at all. The third-party release is based on the so-called “ricochet” principle, whereby a non-debtor guarantor is granted a release because otherwise it would assert claims made against it back against the scheme debtor in contravention of the debt-reduction purpose of the scheme.

On February 3, 2025, the so-called “scheme meeting” occurred, and a total of 53 noteholders, representing 75.9% (in amount) of the $351 million being restructured, voted unanimously (with no objectors) in favor of the scheme. The English court promptly approved the scheme at the so-called “sanction hearing” two days later.

Chapter 15 Recognition and Enforcement of Mega Newco’s English Scheme
The United Nations Model Law on Cross-Border Insolvency is, as the name suggests, a model law designed around facilitating the “recognition” by one or more courts (in adopting nations) of insolvency proceedings commenced in another nation. The Model Law also contains tools for the discretionary enforcement of orders and judgments from foreign courts, and for cooperation between courts in multiple countries. The Model Law has been adopted (sometimes with variations) in approximately 60 countries, including the United States and England. The U.S. version is “chapter 15” of the U.S. Bankruptcy Code.

To complete its strategy for restructuring the U.S. Notes Facility, Operadora sought to secure (1) recognition in the United States of Mega Newco’s scheme proceeding, and (2) enforcement by the U.S. Bankruptcy Court of Mega Newco’s restructuring scheme, including by enjoining any recovery actions by holders of the U.S. Notes (presumably those who did not vote) against Operadora. Accordingly, Mega Newco commenced a chapter 15 proceeding in the U.S. Bankruptcy Court for the Southern District of New York. No creditors opposed the recognition and enforcement relief sought by Mega Newco in the United States.

To obtain chapter 15 recognition of a foreign insolvency proceeding, that proceeding must be either (1) a “foreign main proceeding” or (2) a “foreign nonmain proceeding.” To qualify as a foreign nonmain proceeding, the debtor must have an “establishment” in the foreign jurisdiction, i.e., “an actual place from which economic market-facing activities are regularly conducted,” a standard that Mega NewCo, an entity formed solely “for the purpose of enabling the English Court to take jurisdiction over the proposed scheme of arrangement,” could not meet. In re Mega NewCo, 2025 WL 601463, at *2. To qualify as a foreign main proceeding, the debtor’s “center of main interest” (commonly referred to as COMI) must be in the foreign jurisdiction. “In the absence of evidence to the contrary, the debtor’s registered office … is presumed to be the center of the debtor’s main interests.” On this basis, Mega Newco argued that its COMI was in England.

In ruling, Judge Wiles found he was not presented with any “contrary evidence” and held England to be Mega Newco’s COMI. In re Mega NewCo, 2025 WL 601463, at *3.

Judge Wiles nevertheless addressed his concern that a “debtor might try to manipulate its COMI … to thwart creditor expectations or to accomplish other improper objectives.” Although chapter 15 allows a U.S. Bankruptcy Court to deny recognition and enforcement, including where it finds material defects around the record of the foreign proceeding and undue prejudice to creditors, Judge Wiles found no such defects in Mega NewCo’s scheme. Instead, Judge Wiles found particularly persuasive that (1) the noteholders were “aware of the basis on which U.K. jurisdiction has been asserted and have not objected to it” and (2) there was “not a single objection to the recognition of the U.K. proceeding or the enforcement of the U.K. order.” In re Mega NewCo, 2025 WL 601463, at *4.

Accordingly, Judge Wiles opined “[i]t would be absurd for me to thwart the creditors’ constructive desires and expectations in the guise of supposedly protecting them.” As such, he exercised his discretion under Bankruptcy Code section 1521 to enforce the English court’s judgment approving Mega Newco’s scheme, including the third-party release of Operadora from the U.S. Notes Facility.

Conclusion
For U.S. practitioners, Operadora’s English three-step (enabling the real borrower to obtain “ricochet” guarantor releases) is as notable as manufacturing English COMI to further its venue-shopping strategy. Sensibly, Operadora was fully transparent with the courts as to its strategy, and likely obtained the noteholders’ consent before commencing the English scheme.

Judge Wiles’ ruling suggests, however, the result could be different if manufactured COMI is challenged and creditors oppose recognition. Ultimately, the collective decisions from the U.S. and English courts arguably reward, indeed encourage, creative solutions for restructurings, provided a high-level of support exists from affected creditors.

(This is another in our series of client alerts related to international and cross-border insolvency issues.)