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Cross Border Insolvency

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Alan Van Praag



 By Alan Van Praag, Esq., Robert K. Gross, Esq., and Edward W. Floyd, Esq.*


This article discusses Chapter 15 of the United States Bankruptcy Code which is the US version of the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”) and governs how US bankruptcy courts handle proceedings in aid of non-US  insolvency-related cases.  The basic principle is that a debtor subject to insolvency proceedings in another country can apply to a US bankruptcy court to have the foreign proceeding “recognized.”

As a practical matter, recognition means that the US court will defer to the foreign proceeding and grant a potentially wide range of protective relief to the foreign debtor and its representative.  If statutory requirements for recognition exist, then the court will grant recognition and extend relief.  Most notably, Chapter 15 provides that, upon such recognition, an automatic stay goes into effect, barring the commencement or continuation of creditor actions against the debtor or its property within the United States.  Indeed, foreign debtors now routinely seek such a stay on an interim basis in the form of an injunction, even before a hearing on their request for recognition.  Other wide-ranging powers may be granted to the representative of a debtor whose petition for recognition is granted by the bankruptcy court including, by way of example, the power to conduct discovery regarding the debtor’s assets and liabilities, the power to realize the debtor’s assets in the US, the power to avoid some transactions, and the power to distribute debtor assets located in the US.

Given that international corporations facing the prospect of insolvency routinely have assets, interests or activities in the United States, the relief available under Chapter 15 can be devastating to the interests of creditors in their efforts to satisfy judgments or to secure pending claims.

Nonetheless, our experience has been that creditors faced with the prospect of a non-US debtor seeking relief under Chapter 15 are not without recourse.  Working closely with US attorneys who have expertise in dealing with the interaction between Chapter 15 cases and judgment enforcement / security matters such claimants can often take action to limit and possibly eliminate the impact of a Chapter 15 filing on their recovery efforts.

Notably, we have had a string of successes in obtaining “carve-outs” from pre-recognition Chapter 15 injunctions that have enabled our clients to arrest vessels that debtors have time chartered.  Also, while courts typically order that a debtor’s assets which have been seized as pre-judgment security must be turned over to the debtor’s representatives for distribution in foreign proceedings, we have had successes in enabling clients to retain security in, or to foreclose upon, property that foreign debtors had sought to insulate in their Chapter 15 proceedings.

Chapter 15 was enacted in 2005 and the practice and law in this area is rapidly developing.  The insights we have gained from our experiences with some of the earliest Chapter 15 litigations enable us to help creditors plan their responses to a Chapter 15 filing and take full advantage of their developing rights in this area.  Debtors may also benefit from these insights in planning their filings in anticipation of objections that may be raised in a Chapter 15 case.  Accordingly, this article is intended to familiarize all interested parties with issues of relevance to Chapter 15 cases.


Domestic insolvency related proceedings in United States courts are governed by the U.S Bankruptcy Code (Title 11 of the United States Code or 11 U.S.C.).  One chapter (Chapter 7) concerns liquidation of U.S. companies and another (Chapter 11) addresses reorganization.  Such proceedings can be brought in a bankruptcy court located in the federal judicial district where the debtor (or any of its subsidiary companies) maintains its principal place of business.

Broadly speaking, these procedures establish a regime for the orderly protection of both debtor and creditor rights.  However, the provisions of Chapters 7 and 11 are limited to situations where the debtor is a US company.  11 U.S.C. 109(a) (providing that “only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.”)

Neither Chapter 7 nor Chapter 11 addresses ancillary cases for relief in aid of foreign insolvency-related proceedings.  Chapter 15, enacted in 2005, now provides for such relief.  However, before the implementation of Chapter 15, bankruptcy courts had the statutory power to handle cross-border cases pursuant 11 U.S.C. Section 304.

While Section 304 has been replaced by Chapter 15, the case law and practice may still be significant in interpreting provisions of Chapter 15 that are not facially inconsistent with the prior statute and as to which there has been little written in case law.  While the 2005 enactment of Chapter 15 as a replacement for Section 304 is generally viewed as having largely curtailed judicial discretion, various provisions of Chapter 15 (and the UNCITRAL Model Law) call upon debtors to meet several broadly-stated requirements to obtain recognition and relief.  To some extent, the proof of those requirements may involve courts and litigants in fact-based inquiries concerning fairness to creditors and public policies that are similar to the regime under Section 304.

Section 304 was based on principles of international comity and was intended to provide a procedural mechanism for dealing with the complex problems involved in determining the “legal effect the United States courts will give to foreign bankruptcy proceedings.”  Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452, 454 (2d Cir. 1985).  “The overriding purpose of § 304 [was] to prevent the piecemeal distribution of a debtor’s estate.”  In re Koreag Controle et Revision S.A., 961 F.2d 341, 358 (2d Cir. 1992).  As a general rule, courts would therefore “defer to [a] foreign proceeding . . . to facilitate the centralized liquidation” of the debtor if the foreign proceeding was “instituted in [a] debtor’s domiciliary country.”  In re Treco, 240 F.3d 148, 153 (2d Cir. 1987).

Under Section 304, US bankruptcy courts exercised considerable discretion in deciding whether to defer to foreign insolvency proceedings and how to deal with particular requests of non-US debtors. Section 304 expressly enumerated several factors governing such extensions of comity, providing that decisions should “be guided by what will best assure an economical and expedition administration of [a foreign debtor’s estate] consistent with –

(1) just treatment of all holders of claims against or interests in such estate;

(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;

(3) prevention of preferential or fraudulent dispositions of property of such estate;

(4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title;

(5) comity; and

(6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.

In re Treco, 240 F.3d at 154; 11 U.S.C. § 304(c).

Moreover, even if all of those factors favored deference to the foreign proceeding, US courts would only defer if the foreign “proceedings [did] not violate the laws or public policy of the United States . . . and if ‘the foreign court abide[d] by fundamental standards of procedural fairness.’”  Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 246 (2d Cir. 1999) (internal citations omitted).  In considering such fundamental fairness under Section 304, courts considered:

(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtor’s potential claimants; (5) whether there are provisions for creditors meetings; (6) whether a foreign country’s insolvency laws favor its own citizens; (7) whether all assets are marshalled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims.

Id. at 250.

Accordingly, Section 304 called for a case-by-case analysis characterized by substantial judicial discretion.   In re Treco, 240 F.3d at 154-55 (noting that Section 304 was “designed to give [courts] maximum flexibility in handling ancillary cases . . . rather than being provided with inflexible rules”) (describing Section 304 as requiring a “case-specific analysis”); In re Board of Directors of Telecom Argentina, S.A., 528 F.3d 162, 169 (2d Cir. 2008) (Section 304 also gave a “bankruptcy court . . . broad latitude in fashioning relief necessary to preserve deference to a foreign proceeding.”)



Chapter 15 governs all cases for recognition of foreign bankruptcy proceedings filed in the United States on or after October 17, 2005.  The main distinction between Chapter 15 and its predecessor is immediately apparent.  Whereas Section 304 called for a case-by-case analysis of the factors described above, “Chapter 15 dispenses with [that] explicit requirement” in favor of a few broadly stated factual requirements for recognition.   In re Telecom Argentina, 528 F.3d at 169, n.7.  Under Chapter 15, the key substantive issues are whether there is a “foreign proceeding” within the statutory meaning of that phrase; and whether that foreign proceeding is pending in a country where the debtor has either its “Center of Main Interests” (or “COMI”) or an “establishment.”  (Ibid)  Each of those defined terms (a “foreign proceeding, ” “COMI, ” and an “establishment”), is critical to the court’s determination of whether recognition should be granted and, if so, what relief is available to protect the debtor and its assets in the US.

Separate sections of this article address the substantive requirements for Chapter 15 relief in greater detail.  As a preliminary matter though, it is necessary to establish a baseline familiarity with the key procedures and events involved in a Chapter 15 case.

To begin, there must be a proceeding pending outside of the US with respect to a debtor’s liquidation or reorganization.  There must also be a “foreign representative” (either a person or organizational body) authorized to administer the overseas proceeding or “to act as a representative of such foreign proceeding.”  11 U.S.C. § 101(24) (defining the term “foreign representative”).  Thus, it is the foreign representative, acting on behalf of the purported foreign proceeding, who commences a Chapter 15 case.  11 U.S.C. § 1504, 1515; In re Grand Prix Associates, Inc., 2009 WL 1410519, *4 (Bankr. D.N.J. 2009).  In re Bear Stearns High–Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325, 331 (S.D.N.Y. 2008).

The foreign representative commences the Chapter 15 case by filing a petition for recognition of the foreign proceeding with a US bankruptcy court.  11 U.S.C. § 1504.[1]  Soon after that filing (the “Filing Date”), the bankruptcy court schedules a hearing for the purpose of determining whether to grant recognition or not (the “Recognition Hearing”).  11 U.S.C. § 1517 (providing that an order recognizing a foreign proceeding can only be entered “after notice and a hearing”).

Several weeks will typically pass between the Filing Date and the Recognition Hearing.  During that interval (commonly referred to as the “Gap Period”) neither the foreign debtor nor its assets are automatically protected from creditor actions in the US.  Despite the absence of automatic protections, the foreign representative can request a so-called “Gap Period Injunction” to restrain creditor actions.  11 U.S.C. § 1519 (providing the scope of relief “that may be granted upon filing [a] petition”).  However, it is by no means guaranteed that a court will grant such an injunction and creditors can object.  Indeed, as is further discussed below, creditors can oppose the issuance of any injunction or can ask the court to grant a “carve-out” enabling creditors to take specifically defined steps to protect their interests prior to the hearing on recognition.  See infra “Commencement of the Case & Gap Period Injunctions” at 9-14.

Regardless of whether provisional relief is sought or granted, the court will eventually hold a recognition hearing.  The foreign representative must carry the burden of proving at the hearing that recognition is warranted.  In that respect, the foreign representative must demonstrate: (i) that there is a foreign proceeding within the statutory definition of that phrase, see infra “Is There a Qualified Foreign Proceeding” at 14-22; and (ii) that such foreign proceeding is either taking place in the country where the debtor has its “Center of Main Interests” (COMI) or an “establishment” within the statutory meanings of those terms, see infra “Foreign Main Proceeding vs. Foreign Non-Main Proceeding” at 22-25.  If the representative fails to prove any of those requirements then recognition may not be granted.  In re Ran, 607 F.3d 1017 (5th Cir. 2010); In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325 (S.D.N.Y. 2008).

In the event that the debtor demonstrates that it is the subject of a “foreign proceeding” which is taking place in a country where the debtor has its COMI, then the proceeding is a “foreign main proceeding” and extensive relief, including an automatic stay prohibiting creditor actions against the debtor and its property in the US, will immediately come into effect.  11 U.S.C. § 1520.  Alternatively, if the debtor shows that it is the subject of a “foreign proceeding” within the definition of the statute, but that such proceeding is only pending in a country where the debtor has an “establishment” (and not its COMI) then there is no automatic stay.  The representative may still request a court order imposing protections, including a stay against creditor actions in the US.   However, the requests will not necessarily be granted. 11 U.S.C. § 1521.

As discussed below, notwithstanding that the elemental requirements for Chapter 15 recognition are tersely worded (“foreign proceeding, ” foreign representative and COMI), as discussed in this article, they each contain components (some found in the statute and others in legislative history or developing case law) that can lead to litigation on the question of a foreign debtor’s entitlement to Chapter 15 relief.   For example, the statutory requirement that a foreign proceeding must be “collective” opens the door to issues respecting whether creditors are treated fairly and justly in the foreign proceeding (which had been historically viewed as factors under Section 304).  Moreover, Chapter 15 also provides a limited but important “safety valve, ” enabling courts to consider whether granting Chapter 15 relief would be manifestly contrary to United States public policy.  In re Qimonda Bankruptcy Litigation, 433 B.R. 547, 567 (E.D.VA. 2010) (discussing 11 U.S.C. § 1506); see infra “Statutory Safety Valves” at 25-29.


  1. 1.    Commencement of the Case and Gap Period Injunctions

As noted above, the mere filing of a Chapter 15 petition does not automatically give rise to any automatic relief such as the protection afforded by the automatic stay prohibiting the commencement or continuation of creditor actions.  In re Pro-Fit Holding Ltd., 391 B.R. 850, 864 (C.D.Cal. Bankr. 2008) (“the filing of a chapter 15 petition does not automatically impose a stay on creditor collection efforts [and] in some chapter 15 cases, the automatic stay never comes into effect.”)  Such relief only automatically applies following recognition, and then only if the foreign proceeding is recognized as a “foreign main proceeding.”

Nonetheless, Chapter 15 authorizes courts to issue a broad range of provisional relief during the Gap Period, including a Gap Period Injunction staying creditor actions against the debtor or its assets in the US.  In re Vitro SAB de C.V., 455 B.R. 571, 578 (Bankr. N.D.TX. 2011) (citing In re Pro–Fit Holdings Ltd., 391 B.R. at 858).  Such provisional relief is only available upon a showing that it is “urgently needed to protect the assets of the debtor or interests of the creditors.”  11 U.S.C. § 1519.[2] The scope of such relief provisional relief can include an order:

(1) staying execution against the debtor’s assets;

(2) entrusting the administration or realization of all or part of the debtor’s assets located in the United States to the foreign representative or another person authorized by the court, including an examiner, in order to protect and preserve the value of assets that, by their nature or because of other circumstances, are perishable, susceptible to devaluation or otherwise in jeopardy; and

(3) any relief referred to in paragraph (3), (4), or (7) of section 1521(a) [i.e, suspending the transfer or encumbrance of the debtors property, authorizing discovering with respect to the debtor’s assets, and granting the foreign representative powers ordinarily given to trustees in US bankruptcy proceedings].

11 U.S.C. § 1519.

The court can also grant provisional relief which goes beyond that specifically enumerated in the statute.  In re Vitro SAB de C.V., 455 B.R. at 579 (quoting In re Ran, 607 F.3d at 1021, for the proposition that the scope of provisional “relief enumerated [in the statute] is not all-inclusive.”)  And it is now not uncommon for foreign debtors to request gap period injunctions that exceed the scope of the automatic stay.  Both the availability and scope of a gap period injunction are fertile areas for quick litigation between individual creditors and the debtor, the outcome of which have a significant impact on creditor recoveries.

The availability of such broad provisional relief can, not surprisingly, be very detrimental to creditors.  This is particularly so in the context of maritime disputes where creditors have often obtained pre-judgment security by way of attachments or arrests.  For example, in In re Atlas Shipping A/S, 404 B.R. 726, 731 (Bankr. S.D.N.Y. 2009) creditors had seized over $4 million pursuant to maritime attachment procedures.  However, the court granted a gap period Injunction directing that the attached funds be turned-over to the debtor’s counsel to hold in escrow pending a Recognition Hearing.  The court subsequently granted recognition and ordered the escrowed funds to be turned-over for distribution in the foreign proceeding.

It is therefore very important for creditors to know that Gap Period Injunctions can be challenged.  Doing so successfully demands that creditors engage US counsel with extensive experience opposing provisional relief in Chapter 15 cases coupled with an expertise in judgment enforcement and pre-judgment security mechanisms.

Ideally, such counsel should have experience in each these overlapping areas of law.  On reason for this is that effectively objecting to a Gap Period Injunction may require demonstrating that particular assets (targeted for judgment enforcement or security purposes) are not the debtor’s property under US Bankruptcy Law (even though the same assets may be available for enforcing a claim involving the debtor).

We have successfully used this approach several times in pioneering the concept of “carve-outs” from Gap Period Injunctions for individual creditors, persuading bankruptcy courts, in Chapter 15 cases involving vessel operators to allow our clients to arrest debtors’ time chartered vessels despite the issuance of Chapter 15 injunctions.  Absent such carve-outs, the vessel arrests would have been prohibited.

The arguments used to achieve this result largely depend on the facts of each case.  In one of our cases, a foreign debtor shipping company sought a gap period injunction that would have prohibited all creditors, including our client, from proceeding against vessels in its fleet, regardless of whether the vessels were owned by the debtor (as opposed to being simply time-chartered) and regardless of any showing as to whether the vessels were in use by the debtor or necessary to its operations.  We were able to achieve a carve-out allowing our client to proceed against a vessel to which it the client had supplied fuel oil by making a dual showing that the vessel was not owned by the debtor and not necessary (as the debtor had slated the time-charter contract for rejection in its foreign insolvency proceeding).

In another case, another of our clients needed to obtain a US judgment against a foreign debtor shipping company to establish the amount of its claim against a vessel that was no longer in the debtor’s fleet.  However, the gap period injunction sought by the foreign debtor would have prevented such a judgment.  Based on our knowledge that US bankruptcy judges may lift stays in bankruptcy to enable creditors to establish the amounts of their claims without execution, we made a request to the Bankruptcy Court for a carve carve-out from any Chapter 15 injunction solely to allow our client to establish the amount of its claim as a first step in proceeding against non-debtor property  — the vessel that was no longer in the fleet.   We then brokered settlements with the debtor first granting the requested carve-out and then agreeing to the entry of a judgment with no need to litigate the amount of our client’s claim.

We have also convinced courts to outright deny issuance of any Gap Period Injunctions and to allow our clients to foreclosing on assets already held as security for claims.  In Ashapura Minichem, we represented a shipping company seeking enforcement in the United States of a London arbitration award against a foreign debtor, Ashapura.  We attached monies owing to the debtor by third parties who, in turn, substituted the attached property with a surety bond.  We then followed with a judgment providing for execution either against the third party or against the bond itself – essentially an award in the amount of the collateral we had attached.  Ashapura then filed a petition under Chapter 15 as well as a motion for a gap period injunction seeking to enjoin our client from taking any action on the collateral award.  We argued that the award was not against property of the debtor, and also that the foreign debtor had failed to make a preliminary showing that it would be likely to meet the criteria for Chapter 15 recognition.  Although the court ultimately granted Chapter 15 recognition with an attendant automatic stay, it first denied the foreign debtor’s request for a gap period injunction.   And in that window period we were able to successfully execute on the collateral award and obtain money for our client.

Such successful results stand in contrast to cases in which we were not involved, where Gap Period Injunctions have included orders for creditors to deliver all attached assets to Chapter 15 debtors.  See In re Atlas Shipping A/S, 404 B.R. 726.

  1. 2.    Is There a Qualified Foreign Proceeding?

Regardless of whether a court issues a gap period injunction, Chapter 15 cases proceed to a recognition hearing to determine if recognition is warranted and, if so, in what form.  There, the first issue which the court must address is whether the non-US proceedings for which recognition is sought “are ‘foreign proceedings’ as defined by” the Bankruptcy Code.  In re ABC Learning Centres Limited, 445 B.R. 318, 327 (Bankr. Del. 2010) (describing this issue as “a threshold matter”).

Pursuant to the statutory definition, 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 debt 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).  That definition is replete with phrases, concepts, and terms which are not defined by the Bankruptcy Code and which are thereby open to judicial interpretation.

Specifically, that statutory definition “is comprised of the following seven (7)” requirements:

(a)  a proceeding;

(b)  either judicial or administrative in character;

(c)  collective in nature;

(d)  in a foreign country;

(e)  authorized or conducted under a law related to insolvency or the adjustment of debts;

(f)   in which the debtor’s assets and affairs are subject to the control or supervision of a foreign court; and

(g)  which is for the purpose of reorganization or liquidation.

In re ABC Learning Centres Limited, 455 B.R. at 327; see also In re Betcorp Ltd., 400 B.R. 266, 277 (Bankr. D. Nev. 2009).

The foreign representative also has the burden to show that each of these definitional requirements is satisfied, and only then will the foreign proceedings be “eligible for recognition under Chapter 15.”  In re ABC Learning Centres Limited, 445 B.R. at 327.

Both the debtor seeking Chapter 15 recognition and any creditor seeking to object to recognition should seek US counsel who is intimately familiar with the constantly developing law regarding these definitional concepts.   Also, while the landscape has changed from analyzing “factors” under Section 304 of the Bankruptcy Code to proving “requirements” under Chapter 15, there is a lot of overlap in the substance of the inquiry.  As discussed below, this is most evident in case law interpreting the “collective proceeding” requirement as requiring that a foreign insolvency proceeding afford certain substantive and procedural rights to creditors in order to be recognized under Chapter 15.  The connection between Section 304 and Chapter 15 can also be seen in the provision in 11 U.S.C Section 1506 enabling US courts to consider whether granting Chapter 15 relief would be manifestly contrary to public policy.

Although several of these seven definitional requirements would not appear to be grounds for an objection to recognition in most Chapter 15 cases, the developing case law under Chapter 15 leads us to view several of these requirements as presenting significant ground for possible new challenges in Chapter 15 litigation.[3] Those requirements are (i) the existence of a “proceeding, ” (ii) whether the proceeding provides for judicial control or supervision over both a debtor’s assets and its affairs, (iii) whether the proceeding is “collective in nature, ” and (iv) whether it is being conducted for a liquidation or reorganization purpose.  Each of these warrants separate attention.

  1. a.    Is there a proceeding?

There must be a “proceeding” in order for there to be a foreign proceeding.  “The essence [of a proceeding] calls for acts and formalities set down in law so that courts, merchants and creditors can know them in advance, and apply them evenly in practice. In the context of corporate insolvencies, the hallmark of a ‘proceeding’ is a statutory framework that constrains a company’s actions and that regulates the final distribution of a company’s assets.”   In re Betcorp, 400 B.R. at 278 (holding that voluntary winding-up proceedings conducted under the Australian Corporations Act were proceedings).

Given this requirement, we believe that it is essential for counsel handling a Chapter 15 dispute to thoroughly familiarize themselves with the intricacies of the foreign law under which a purported Foreign Proceeding is pending.  Doing so may identify issues that, from a creditor’s perspective, ought to be brought to the attention of a US bankruptcy court.

Relevant questions may include whether the foreign statute expressly establishes a framework for determining competing priorities amongst creditor classes, or merely leaves such issues up to the discretion of a foreign authority.

An interesting question that we have raised in litigation is whether an action conducted in a foreign country pursuant to a liquidation-related statute that has been repealed by the legislature of that country constitutes a proceeding for purposes of Chapter 15.  The basic point is that US counsel must understand the foreign statute at issue.

  1. b.    Are the debtor’s assets and affairs subject to judicial control?

A debtor’s assets and affairs must be subject to judicial control or supervision.  Published decisions have not provided any significant discussion concerning this requirement other than to confirm its conjunctive nature in that both the “assets and affairs must be subject to the jurisdiction of a foreign court.”  In re Gold and Honey, Ltd., 410 B.R. 357, 371 (Bankr. E.D.N.Y. 2009) (emphasis in the original) (denying recognition of an Isreali receivership action where the receivers demonstrated control over the debtor’s assets but failed to do so with respect to the debtor’s business affairs).

When analyzing this requirement of Chapter 15 recognition for a particular proceeding, relevant questions include:

  • Does the concerned foreign statute provide for any judicial control or supervision?;
  • Does that control or supervision cover both assets and affairs?; and
  • In the cases where a holding company is the debtor, but its subsidiaries are in different jurisdictions, what authority does the foreign court have over the subsidiaries’ assets and affairs?

Highlighting the need to be vigilant in this area, we have litigated a case in which a foreign representative’s counsel filed multiple papers repeatedly stating that the debtor’s assets were subject to judicial control but which failed to make any reference to the debtor’s affairs, even after that shortcoming was identified.  This is just one type of issue that may not be apparent, but that creditors can raise in support their objections the Chapter 15 recognition.

  1. c.    Is the foreign proceeding collective in nature?

A very significant aspect of the definitional test for a foreign proceeding is the “collective in nature” requirement.  “A proceeding that is ‘collective in nature’ is one that ‘considers the rights and obligations of all creditors.’”  In re Betcorp, 400 B.R. at 281(holding that a proceeding was collective because creditor attempts to undermine the orderly and cooperative system accounting for all creditor rights would be barred by law); In re Bd. of Dirs. of Hopewell Int’l Ins., Ltd., 275 B.R. 699, 707 (S.D.N.Y. 2002) (finding a “scheme of arrangement” for creditors to estimate and file claims to be collective because all creditors had the right to object to proposed schemes and the court was involved in approving all aspects).

Additionally, a developing body of case law suggests that liquidation and reorganization proceedings will typically be collective, but that the same is not true with respect to receivership proceedings.  In re Gold and Honey, Ltd., 410 B.R. at 370 (“a receivership proceeding, as opposed to a ‘collective’ proceeding, is generally regarded as more prejudicial to the creditor body as a whole than [a U.S.] federal bankruptcy proceeding”); Betcorp, 400 B.R. at 281 (distinguishing collective liquidation and reorganization remedies from non-collective, “receivership remed[ies] instigated at the request, and for the benefit of, a single secured creditor”; but see In re Ernst & Young, Inc., 383 B.R. 773, 776 (Bankr. D.Col. 2008) (recognizing a Canadian receivership proceeding).

To be clear, the case law concerning what constitutes a collective proceeding is still developing.  However, a series of factors relevant to the analysis can be gleaned from cases considering the issue and include the following:

  • Those conducting the proceeding (be they trustees, administrators, or receivers) should have a statutory requirement “to consider the rights and obligations of all creditors.”  In re Gold and Honey, Ltd. 410 B.R. at 370;
  • The proceedings should be “compulsory” in that they require all creditors to participate within the confines of the proceeding rather than allowing some creditors to act on their own and seek independent remedies to the detriment of the proceeding’s good order and cooperative character.  See In re ABC Learning Centres, Limited, 445 B.R. at 328;
  • The statutory guidelines for the proceedings should ensure that “[s]ubject to priorities, preferences, etc., debts and claims rank equally and are to be paid pro rata.”  Id. (describing Australian liquidation proceedings as establishing such a system which favors a finding of collectiveness);
  • Notice of a proceeding’s commencement should be provided to all creditors.  In re British American Insurance Co., Ltd., 425 B.R. 884 (Bankr. S.D.Fla. 2010); and
  • Creditors should have access to judicial review of any decisions issued from the proceeding.  In re ABC Learning Centres, Limited, 445 B.R. at 329.

The foregoing considerations are not unique to the Chapter 15 context.  Indeed, the considerations concerning collectiveness are similar to those which were previously applied in the Section 304 context with respect to the question there of whether a foreign proceeding comported with concepts of “fundamental fairness.”  See Finanz AG Zurich v. Banco Economico S.A., 192 F.3d at 246; see discussion supra p.5.

Given these similarities, we believe it would be quite reasonable to argue to a court evaluating the collectivity requirement under Chapter 15 that its decision should be informed by cases which evaluated fundamental fairness in the Section 304 context.  The basic point is that the analytical factors are essentially the same.  Thus, decisions applying those equivalent factors in Section 304 cases should be persuasive in Chapter 15 cases.

  1. d.    Is the foreign proceeding being conducted for a reorganization or liquidation purpose?

In order to satisfy the definitional requirement for being deemed a “foreign proceeding” under Chapter 15, the concerned proceeding must have a “reorganization or liquidation purpose.”  See In re Betcorp, 400 B.R. at 285.  Courts have held that this requirement is case-specific meaning that it focuses not on the general nature of the statute governing the non-US proceeding but, rather, on the nature of the specific proceeding for which US recognition is sought. [4]

One court has observed that where a non-US proceeding could result in various outcomes (including reorganization or liquidation as well as alternatives such as business continuation without any judicial relief), the proceeding was not initially commenced “for the purpose of reorganization or liquidation and therefore was not a ‘foreign proceeding.’”  In re British American Insurance Co. Ltd., 425 B.R. at 906 (nonetheless granting recognition because the foreign court issued an order directing reorganization following commencement of the Chapter 15 case, thereby correcting the deficiency).  There may thus be basis for challenging recognition under Chapter 15 where a non-US proceeding’s purpose remains indeterminate at the time of the hearing on recognition.

To date, without citing this definitional element (namely, a proceeding for the purpose of reorganization or liquidation) one bankruptcy case cut back on the relief available to a foreign debtor based on its finding that the “frustration of an existing judgment . . . [was] the only apparent reason” for the filing.  In re Sphinx, Ltd., 371 B.R. at 18 (affirming a decision to grant recognition as a foreign non-main proceeding with no automatic stay, rather than foreign main proceeding with an automatic stay, in order to address the debtor’s improper motive).  Given that background, we expect that there may eventually be litigation involving objections to recognition based on arguments that a foreign debtor has no intention of reorganizing or liquidating.   In that regard, it is already established under domestic US Bankruptcy law that it is impermissible to file a Chapter 11 petition for reorganization “which is solely designed to attack a [pre-existing] judgment collaterally.  See Baker v. Lathan Sparrowbush Assocs., 931 F.2d 222, 228 (2d Cir. 1991).

Query whether a foreign debtor with US judgments against it fails to meet the requirement that its foreign proceeding is for the purpose of reorganization or liquidation if it seeks Chapter 15 recognition (and an attendant stay of proceedings against its assets in the United States, where the judgments can be enforced), all for the purpose of forcing the holders of such US judgments into proceedings in a foreign country where the judgments will not be recognized.  We submit that, in such circumstances it may credibly be argued that the foreign proceeding is not for the purpose of reorganization or liquidation but, rather, to disadvantage certain creditors over others.

  1. 3.    Foreign Main Proceeding vs. Foreign Non-Main Proceeding

If a court determines that a foreign action is a “foreign proceeding” for purposes of Chapter 15, it must then consider whether it is a “foreign main proceeding” with an attendant automatic stay, or a nonmain proceeding, requiring the foreign debtor to apply for any such relief. [5]

A foreign main proceeding is one “pending in the country where the debtor has the center of its main interests [‘COMI’].”  11 U.S.C. § 1520; In re Vitro SAB de C.V., 455 B.R. 571; see also In re Artimm, S.R.L., 335 B.R. 149, 159 (Bankr.C.D.Cal.2005).   And, while COMI is not a defined term, bankruptcy courts have analogized it to a debtor’s principal place of business.   See  In re Tri-Continental Exchange, Ltd., 349 B.R. 627, 629 (Bankr. E.D.Cal. 2006); see also In re Basis Yield, 381 B.R. 37, 47–48 (Bankr. S.D.N.Y. 2008).

Significantly, the statute asks this question of each entity applying for Chapter 15 relief, and there is no provision in the statute for amalgamating the locations of related business entities and treating them as a single entity.

When evaluating COMI, courts may consider the location of a debtor’s headquarters, top management, primary assets and creditors, as well as the law which would apply to creditor disputes.  See In re Sphinx, 351 B.R. at 117; In re Ernst & Young, Inc., 383 B.R. 773, 779 (Bankr.D.Colo. 2008); In re Basis Yield, 381 B.R. at 47; In re Loy, 380 B.R. 154, 162 (Bankr.E.D.Va. 2007).

Often times though, a statutory presumption simplifies the COMI issue.  Specifically, there is a rebuttable, statutory presumption that “a debtor’s registered office, or habitual residence in the case of an individual, is” its COMI.  11 U.S.C. § 1516(c).  Nonetheless, the ultimate burden for proving COMI is on the debtor.

Therefore, creditors should not assume that a petition for foreign main recognition made by an offshore entity, with nothing more than a letterbox office in its domiciliary jurisdiction (as is often the case in the maritime industry), will be granted.  Where the debtor’s registered office is just a “letterbox company, ” the COMI presumption does not apply. In re Bear Stearns High Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. at 335-336.

The benefit to creditors of prevailing in a COMI dispute is that the victory can result in foreign nonmain recognition rather than foreign main recognition.  A foreign nonmain proceeding is one pending in a country where the debtor has an “establishment, ” as distinct from a “center of main interests.”  11 U.S.C. § 1517(b)(2).  An “establishment” is “any place of operations where the debtor carries out a non-transitory economic activity.” See 11 U.S.C. § 1502(2).

As already noted, the significance of foreign nonmain recognition is that it does not cause automatic implementation of debtor protections such as the stay of creditor actions in the US.  11 U.S.C. § 1521.  Of course, courts have discretion to grant such relief but, in doing so, must consider whether the relief is “necessary to effectuate [Chapter 15’s] purpose . . . and to protect the assets of the debtor or the interests of the creditors.”  11 U.S.C. § 1521(a).  That higher degree of discretion poses higher risks to the foreign debtor seeking to use Chapter 15 to shield its US assets from creditors.

Moreover, even where discretionary relief is granted, its scope is generally limited “to relief related to assets located in the nonmain jurisdiction or closely connected thereto.”  In re Bear Stearns High Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. at 339; 11 U.S.C. § 1521(c) (“In granting [discretionary] relief . . . the court must be satisfied that the relief relates to assets that, under the laws of the United States, should be administered in the foreign nonmain proceeding”).  Thus, in the case of a holding company involved in insolvency proceedings pending in an offshore jurisdiction, nonmain recognition may be insufficient to prevent creditors from independently pursuing actions against debtor assets which are unconnected with the particular offshore forum.  Basically, nonmain recognition generally provides creditors with greater flexibility to enforce their claims than main recognition.

It should also be noted that if the foreign proceeding is neither a foreign main, nor foreign nonmain proceeding, it is simply not entitled to recognition.  In re Ran, 607 F.3d 1017; In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325 (“If the debtor does not have its center of main interests or at least an establishment in the country of the foreign proceedings, the bankruptcy court should not grant recognition and is not authorized to use its power to effectuate the purposes of the foreign proceeding.”)


Even if all of the requirements for recognition of a foreign main proceeding (be it main or nonmain) are present, Chapter 15 provides an important safety valve by which a court can deny any requested relief.  In that regard, Chapter 15 expressly does not prevent a “court from refusing to take [any] action . . . [that] would be manifestly contrary to the public policy of the United States.”  11 U.S.C. § 1506.[6]

However, the exception is narrowly construed.  In re Tri-Continental Exchange, Ltd., 349 B.R. at 638-39.  Courts have regularly noted that the “word ‘manifestly’ in international usage restricts the public policy exception to the most fundamental policies of the United States.”  In re Tri-Continental Exchange, Ltd., 349 B.R. 638-639 n. 6; see also In re Ephedra Products Liability Litigation, 349 B.R. 333, 336 (S.D.N.Y. 2006).

Only a few decisions have addressed “precisely when U.S. policy is in fact ‘fundamental, ’ thus warranting protection under [section] 1506.”  In re Qimonda AG Bankruptcy Litigation, 433 B.R. at 568 (citing In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr.S.D.N.Y.2010); In re Ernst & Young, Inc., 383 B.R. 773 (Bankr.D.Col.2008); In re Ephedra Prods. Liability Litig., 349 B.R. 333 (S.D.N.Y.2006); In re Gold & Honey,  410 B.R. 357 ( Bankr.E.D.N.Y. 2009)).  Thus, courts are still considering what circumstances might justify invocation of the public policy exception.

One court commenting on the issue summarized the developments in this area as follows:

[I]n deciding whether to apply § 1506, courts have focused on two factors: (i) whether the foreign proceeding was procedurally unfair; and (ii) whether the application of foreign law or the recognition of a foreign main proceeding under Chapter 15 would “severely impinge the value and import” of a U.S. statutory or constitutional right, such that granting comity would “severely hinder United States bankruptcy courts’ abilities to carry out … the most fundamental policies and purposes” of these rights.

In re Qimonda Bankruptcy Litigation, 433 B.R. at 568-569.  Arguably, the Qimonda Court recognized the possibility that extreme impartiality in a foreign forum might be sufficient to support extension of the 1506 exception because such circumstances have justified non-recognition of foreign legal actions in other, non-bankruptcy, cases.  Id. (citing Bridgeway Corp. v. Citibank, 201 F.3d 134, 139, 141–44, [2d Cir.2000] [affirming that a Liberian judgment was unenforceable in the United States because “Liberia’s courts did not constitute a system of jurisprudence likely to secure an impartial administration of justice.”])

Thus, while the case law concerning Section 1506 is not yet fully developed, the important consideration for creditors is that the public policy exception provides an additional basis for objecting to recognition of otherwise qualified foreign proceedings.  The exception may have particular force where a foreign forum’s insolvency laws do not provide for equal treatment of similarly situated creditors.  This is so because US courts have held that it is a “fundamental principle of [US bankruptcy law] that assets be distributed equally among creditors of similar standing.”  Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187, 193 (3d Cir. 1991) (quoting Remington Rand v. Business Sys. Inc., 830 F.2d 1260, 1271 (3d Cir.1987) .  Not only is that a fundamental principle of US bankruptcy law but it is part of “the country’s policy of equality.”[7]  Id. 

Finally, it should be noted that if a court grants recognition to a foreign proceeding, creditors are not left without any further recourse.  As a preliminary matter, creditors can make a post-recognition application for modification or termination of a proceeding.  11 U.S.C. § 1517(d) (providing that Chapter 15 does not prevent a court from issuing an order for the “modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist”).  Therefore, if creditors recognize that the circumstances which prevailed in a foreign proceeding at the time it was recognized (such as being collective or for a liquidation or reorganization purpose) have changed, creditors should bring this issue to the US bankruptcy court’s attention.

Section 305 of the Bankruptcy Code provides yet another remedial opportunity  by providing, in pertinent part, that:

The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if . . . a petition under section 1515 for recognition of a foreign proceeding has been granted; and the purposes of chapter 15 of this title would be best served by dismissal or suspension.

11 U.S.C. § 305.  The referenced purposes of Chapter 15 are set forth in  11 U.S.C. § 1501 as follows:

(1)  Cooperation between –

(A)         Courts of the United States, United State trustees, trustees, examiners, debtors, and debtors in possession; and

(B)         The courts and other competent authorities of foreign countries involved in cross-border insolvency cases;

(2)  Greater legal certainty for trade and investment;

(3)  Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor;

(4)  Protection and maximization of the value of the debtor’s assets; and

(5)  Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

To date, only one case has addressed the relief available under Section 305.  In re SNP Boat Services S.A., 453 B.R. 446 (Bankr. S.D.Fl. 2011) (questioning whether due process had been afforded to a Canadian creditor in a French bankruptcy proceeding which denied recognition of a Canadian judgment, and stating that the US bankruptcy court would revoke recognition under Section 305 if the debtor did not produce discovery on the due process issue).  This decision should be noted by both creditors and debtors because Section 305 greatly expands the scope of issues that can be addressed by a bankruptcy court dealing with a Chapter 15 case.

Notably, while the purposes of Chapter 15 (recited in Section 1501) are not relevant at a Recognition Hearing, they are expressly relevant to a motion to terminate recognition under Section 305.  This becomes significant if, after US recognition, a foreign proceeding takes a turn for the worse and fails to treat creditors in accordance with fundamental principles of fairness.  Such creditors should consult US bankruptcy counsel regarding the possibility of seeking relief pursuant to Chapter 305.


            Chapter 15 provides overseas debtors with a highly effective mechanism for obtaining powerful relief from a US bankruptcy court during the pendency of a foreign insolvency-related proceeding.  Such relief can include an automatic stay barring the commencement or continuation of creditor actions against a debtor or its property in the United States following US recognition of the foreign proceeding.  Similar relief can even be granted, and often is, prior to recognition by way of Gap Period Injunctions.  Moreover, bankruptcy courts handling Chapter 15 cases have the power to direct creditors holding pre-judgment security for claims against debtors to turn-over such security to a debtor’s representatives for distribution to creditors at-large.

The imposition of all such relief can, for obvious reasons, be highly beneficial to debtors and equally detrimental to creditors.  However, neither party should assume the mere filing of a Chapter 15 petition renders the extension of relief inevitable.  Creditors can successfully contest any relief sought by a debtor at every stage of a Chapter 15 proceeding.  In multiple cases, we have defeated applications for Gap Period Injunctions and obtained “carve-outs” from the same.  In doing so, we have enabled our clients to execute against pre-existing security, to pursue new security, and to reduce claims to judgments.

An ever developing body of case law also demonstrates that courts will hold debtors to their burden of proof to establish the existence of the requirements for recognition (the existence of a qualified foreign proceeding pending in a location where the debtor has its COMI or an establishment).  Moreover, even where a court has granted recognition, creditors can still look to US courts for relief if termination of a foreign proceeding would best serve the purposes of Chapter 15 notable including – “the fair and efficient administration of cross-border insolvencies that protects that interests of all creditors.”  11 U.S.C. § 1501.

However, in order for debtors and creditors alike to protect their interests in a Chapter 15 case, it is essential to engage US counsel with extensive experience, and a record of success, in this complex area of the law.

Should you wish to discuss any particular aspect of this article in greater detail, we are available to do so at your convenience.

[1] The Petition must also be accompanied by: (i) a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; (ii) a certificate from the foreign court affirming the existence of the foreign proceeding and the appointed foreign representative; (iii) . . . any other evidence satisfying the court that the foreign proceeding has been commenced and the foreign representative has been appointed; and (iv) a statement identifying all foreign proceedings with respect to the debtor that are known to the foreign representative.  In re Grand Prix Associates, Inc., 2009 WL 1410519, *4 (quoting 11 U.S.C. § 1515).

[2] In order to determine the appropriateness of a particular gap period injunction, courts are also required to apply the same standards which otherwise apply to requests for a preliminary injunction.  11 U.S.C. § 1519 (“[t]he standards, procedures, and limitations applicable to an injunction shall apply to relief under this section”).  The general rule is therefore that, in order to be successful on a motion for a gap period injunction, the movant must show: (1) a likelihood of success on the merits; (2) a likelihood of irreparable harm if the preliminary relief is not granted; (3) that the balance of equities favors the movant; and (4) that the requested injunction would be in the public interest.  See In re Vitro SAB de C.V., 455 B.R. at 580.

[3] Several requirements appear quite straightforward and only warrant passing comment.  Regarding the second requirement (judicial or administrative), the basic point is that a proceeding which is largely administrative in character (such as one conducted by liquidators or other appointees tasked with gathering and distributing assets) can still be a qualified foreign proceeding.  In re ABC Learning Centres Limited, 445 B.R. at 328 (liquidation proceedings which were primarily administrative satisfied the disjunctive administrative or judicial requirement).  Regarding the fourth requirement (whether a proceeding is taking place a foreign country), this issue is, barring unique circumstances such as those involving unrecognized states, self explanatory.  Likewise, regarding the fifth requirement (under a law related to insolvency or debt adjustment), courts simply review the concerned foreign statute to assess whether it relates to the relevant matters.

[4]     This is so because, in the Bankruptcy Code’s definition of a Foreign Proceeding “[t]he phrase ‘for the purpose of reorganization or liquidation’ appears after a comma, at the end of the definition . . . [that] phrase could relate to one of two concepts in the definition, either the law referenced earlier in the definition, or the subject foreign action itself. Since the definition of ‘foreign proceeding’ already includes the requirement that the proceeding arise under ‘a law relating to insolvency or adjustment of debt, ’ it would be redundant to conclude the phrase ‘for the purpose of reorganization or liquidation’ also relates to the law governing the foreign action. The only reasonable conclusion is that the definition requires that the particular proceeding subject to recognition be ‘for the purpose of reorganization or liquidation.’” In re British American Insurance Co. Ltd., 425 B.R. at 905.

[5] The automatic stay is provided for by Section 362 of the Bankruptcy Code and prohibits, amongst other things: the commencement or continuation of any legal proceedings against the debtor with respect to pre-petition claims; the enforcement of any pre-petition judgments against the debtor or its property; and the perfection of any pre-petition liens against the debtor’s property.  Additional relief that automatically applies upon recognition of a foreign main proceeding, or which may be granted in the case of a foreign nonmain proceeding, includes: the ability for the debtor to void certain post-petition transfers of its property under Section 549 of the Bankruptcy Code; and the exclusion of pre-petition security interests from attaching to property acquired by the debtor after filing of the petition pursuant to Section 552 of the Bankruptcy Code.  It should be noted though that all the relief afforded to a Chapter 15 debtor only applies within the territorial jurisdiction of the United States.

[6] Elsewhere, Chapter 15 also provides that, to the extent Chapter 15 “conflicts with an obligation of the United States arising out of any treaty or other form of agreement to which it is a party with one or more other countries, the requirements of the treaty or agreement prevail.”  11 U.S.C. § 1503.  This provision has not been the subject of any reported decisions but would seem to provide another possible basis for denying recognition in the rare case to which it might apply.

[7] A lack of pari passu treatment of similarly situated creditors in a foreign insolvency proceeding would also seem to be relevant to determining whether a foreign debtor meets the requirement of showing that its foreign proceeding is “collective” in nature.

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