Cross-Border Insolvency Update – A Breakthrough for Creditor Rights: Dismissal of a Chapter 15 Case
Eaton & Van Winkle LLP recently achieved a major breakthrough for the protection of creditor rights in connection with cross-border insolvency proceedings. (For ease of reference, our February 2012 article concerning cross-border insolvency proceedings under Chapter 15 of the Bankruptcy Code is attached, providing a detailed discussion of the statutory framework and interpretive case law in this area). The breakthrough described by this update concerns the first ever dismissal of a Chapter 15 case obtained by creditors arguing that a court should terminate recognition of a foreign insolvency proceeding, and lift the resulting automatic stay of creditor enforcement efforts in the US, because “circumstances had changed” following an initial grant of recognition.
In late 2011, Ashapura Minechem Ltd. filed a Chapter 15 petition in the United States Bankruptcy Court for the Southern District of New York for recognition of an interim foreign insolvency proceeding in India. The concerned foreign proceeding was pending before the Board for Industrial and Financial Reconstruction (“BIFR”) in India under that country’s Sick Industrial Companies Act (“SICA”). We opposed recognition on behalf of our client (for whom we had previously obtained a US judgment in excess of $70 million) principally on the grounds that the SICA Statute had been assailed as a haven for abuse against unsecured creditors and had been repealed by the Indian Parliament (with the repeal statute awaiting implementation), and that the proceedings in India were being used to stay our client without any assurance of equitable participation. We argued that the deficiencies and unfairness of the proceedings in India to our client were apparent both at the outset and over time, as the Indian proceedings progressed without our client being allowed to participate. Although the bankruptcy court initially granted recognition, it did so with caution, conditioning recognition on (a) requiring the debtor to hold regular status conferences for monitoring developments in India, and (b) reserving the right of creditors to make an application for modification or termination of the recognition order.
During the course of subsequent status conferences, we pointed out that our client was still not being allowed to participate as a claimant before the BIFR due to actions by the foreign debtor to delay or prevent the recognition of our client’s claim. We followed with a motion seeking an order terminating US recognition or, alternatively, directing Ashapura to post security for our client’s claims. In support of the termination request we argued that “circumstances had changed since the time at which recognition was granted” so that the court had statutory authority to revoke recognition in accordance with Chapter 15’s provision authorizing “modification or termination of recognition if it is shown that the grounds for granting [recognition] were fully or partially lacking or have ceased to exist.” 11 U.S.C. 1517(d). In support of the request for security, we argued that Chapter 15 expressly empowers a US bankruptcy court to direct a debtor to post a bond to protect creditors’ interests. 11 U.S.C. 1522(b) (“The court may subject relief . . . to conditions it considers appropriate, including the giving of security or the filing of a bond.”).
Following our oral argument, the court granted the application by way of two, successive orders. The first order directed Ashapura to post a bond for our client’s claims and to ensure that our client could fully participate in the BIFR proceedings, and to do so within 45 days or face dismissal of the Chapter 15 case. When Ashapura failed to meet these conditions, the bankruptcy court entered the second order, dismissing the Chapter 15 case, terminating recognition, and thereby lifting the stay on creditor enforcement efforts in the US.
This case represents the first time a US court has utilized the “changed circumstances” grounds to dismiss a Chapter 15 case. Indeed, it appears to be the first time that a creditor has obtained dismissal of a Chapter 15 case after an initial grant of recognition on any grounds. As such, this success constitutes a dramatic development in US cross-border insolvency law, and demonstrates that creditors are not at the absolute mercy of foreign debtors who commence Chapter 15 cases to protect abusive insolvency proceedings abroad. Creditors can now rely upon case law demonstrating that a court has the power to terminate recognition in order to prevent foreign debtors from excluding creditors from participating in foreign insolvency proceedings.
Should you wish to discuss any of these considerations in more detail, please feel free to contact us*
*Alan Van Praag email: avanpraag@evw.com
