Chris Laughton, a UK insolvency practitioner and publisher of InsolvencyBlog.com, has a number of recent posts on the adoption in the UK of the Model Law on Cross-Border Insolvency (“Model Law”), a 1997 effort by the United Nations Commission on International Trade Law (“UNCITRAL”). That got me thinking that I should post something on the recent changes to the U.S. Bankruptcy Code on cross-border insolvencies.

Chapter What? On October 17, 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (known as "BAPCPA"), a new Chapter 15 of the Bankruptcy Code went into effect governing ancillary and other cross-border cases. (For those already familiar with ancillary proceedings, Section 304 of the Bankruptcy Code, which previously governed those proceedings, was repealed although many of its concepts have been retained in Chapter 15.)

Where Did Chapter 15 Come From? The main purpose of enacting Chapter 15 was to incorporate the Model Law as part of the Bankruptcy Code. 11 U.S.C. § 1501(a). My partner Adam Rogoff, who has had significant experience with international insolvency matters, has prepared a very helpful chart comparing Chapter 15 and the Model Law’s provisions. Also, because Chapter 15 so closely follows the Model Law, the Legislative Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency, prepared by the Model Law’s authors, is one of the most helpful guides to understanding the meaning of Chapter 15′s provisions.

Given that Chapter 15 is such a creature of statute, I’ve included more citations to the Bankruptcy Code than usual in this post. They are all in the format 11 U.S.C. § ___, which refers to Title 11 of the United States Code (the title of U.S. law that sets out the Bankruptcy Code) and then a particular section number. 

Who Uses Chapter 15? Chapter 15 is used principally by representatives of or creditors in foreign insolvency proceedings to obtain assistance in the United States, by a debtor or others seeking to obtain assistance in a foreign country regarding a bankruptcy case in the United States, or when both a foreign proceeding and a bankruptcy case in the United States are pending with respect to the same debtor. 11 U.S.C. § 1501(b). 

Learning A "Foreign" Language. Several important terms involving different types of foreign proceedings are key to understanding the scope of Chapter 15. 

  • A “foreign proceeding” means “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debts in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” 11 U.S.C. § 101(23). 
  • For purposes of Chapter 15, “debtor” means “an entity that is the subject of a foreign proceeding.” 11 U.S.C. § 1502(1). 
  • A "foreign main proceeding" means a foreign proceeding pending in the country where the debtor has the center of its main interests which, in the absence of contrary evidence, is presumed to be the location of the debtor’s registered office. 11 U.S.C. §§ 1502(4) and 1516(c). 
  • A "foreign nonmain proceeding" means a foreign proceeding, other than a foreign main proceeding, pending in a country in which the debtor has an “establishment,” defined as a place of operations where the debtor carries out a nontransitory economic activity. 11 U.S.C. §§ 1502(2) and (4). 

Getting Some Recognition:The Chapter 15 Process. Chapter 15’s basic procedure is straightforward. A case is commenced when a foreign representative files a petition for recognition of a foreign proceeding. 11 U.S.C. §§ 1504 and 1515(a). If properly filed, the bankruptcy court is entitled to presume that the facts stated in the petition are correct and the attached documents are authentic. 11 U.S.C. §§ 1516(a) and (b). As long as recognition would not be manifestly contrary to the public policy of the United States, the court must enter an order recognizing the foreign proceeding (here’s an example order). 11 U.S.C. §§ 1506 and 1517(a). 

Formal recognition is the key step that triggers the benefits of Chapter 15. If recognition is granted as a foreign main proceeding, the debtor receives important protections and rights similar to those available to U.S.-based debtors. Chief among these are the automatic stay provisions of Section 1520(a) of the Code, which invoke the automatic stay of Section 362 with respect to the debtor and its property within the territorial jurisdiction of the United States. 11 U.S.C. § 1520(a). Other sections invoked by Section 1520 (including Sections 363, 549, and 552) apply to transfers of interests of the debtor in property within the territorial jurisdiction of the United States. 11 U.S.C. § 1520(a)(2). Unless the court orders otherwise, the foreign representative may also operate the debtor’s business consistent with Section 363 and 552. 11 U.S.C. § 1520(a)(3). 

A Matter Of Discretion. Section 1521 gives the court discretion to grant other appropriate relief at the request of the foreign representative, including in foreign nonmain proceedings which, unlike foreign main proceedings, do not invoke Section 1520′s automatic stay. 11 U.S.C. § 1521(a). Under Section 1521(a), the court may, among other things, stay actions or proceedings concerning the debtor’s assets, rights, obligations or liabilities, stay execution against the debtor’s assets, and suspend the right to transfer or dispose of assets of the debtor. 11 U.S.C. §§ 1521(a)(1), (2), and (3). However, Chapter 15 contains certain limitations on the ability of a court to grant the discretionary relief provided by Section 1521:

  • Relief is available only “where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors.” 11 U.S.C. § 1521(a). 
  • Congress made such relief expressly subject to the “standards, procedures, and limitations applicable to an injunction.” 11 U.S.C. § 1521(e). The court has discretion to make any relief granted subject “to conditions it considers appropriate, including the giving of security or the filing of a bond.” 11 U.S.C. § 1522(b).
  • Section 1507 requires the court, in determining whether to give additional assistance to a foreign representative, to consider “whether such additional assistance, consistent with the principles of comity, will reasonably assure” achievement of five specific objectives retained nearly verbatim from former Section 304(c). 
  • These objectives include “just treatment of all holders of claims,” “protection of claim holders in the United States against prejudice and inconvenience,” “prevention of preferential or fraudulent dispositions of property,” “distributions of proceeds” substantially according to the Bankruptcy Code, and, where appropriate, the opportunity for a fresh start for an individual. 

Over There: Protection For U.S. Creditors And Debtors. The Model Law has been adopted in a number of other countries, including Japan, Mexico, Poland, Romania, South Africa, and the UK. According to this recent post on the InsolvencyBlog.com, foreign creditors (including U.S. creditors) are fully recognized in UK insolvency proceedings. Representatives of U.S. based debtors may also obtain protection in countries that have adopted the Model Law. The European Union, which has not yet adopted the Model Law, has its own cross-border insolvency regulation that applies to all EU countries except Denmark.

Check Your Local Listings. Although Chapter 15 and the Model Law have been designed to help coordinate cross-border bankruptcy and insolvency proceedings, these restructurings and liquidations are complex and often require parties to navigate through multiple country-specific insolvency schemes. If you find yourself involved in a cross-border bankruptcy, whether as a debtor, creditor, or a member of a committee, it’s usually critical to get legal advice from U.S. and appropriate foreign insolvency counsel.