Chapter 15 Recognition Denied Due To COMI Manipulation Scheme To Evade U.K. Judgment

More than a decade after the enactment of chapter 15 of the Bankruptcy Code, issues pertaining to recognition of a foreign debtor's bankruptcy or insolvency proceeding under chapter 15 have, in large part, shifted from the purely procedural inquiry (such as the foreign debtor's center of main interests, or "COMI") to more substantive challenges regarding the limits, if any, that chapter 15 places on U.S. bankruptcy courts. But as demonstrated by the recent ruling in In re Creative Finance Ltd. (In Liquidation), 2016 BL 8825 (Bankr. S.D.N.Y. Jan. 13, 2016), U.S. bankruptcy courts continue to closely scrutinize the manner and place of the foreign insolvency proceeding to ensure that it complies with the prerequisites for recognition under chapter 15. In Creative Finance, the U.S. Bankruptcy Court for the Southern District of New York denied recognition of a British Virgin Islands ("BVI") liquidation commenced as part of a scheme to avoid paying a U.K. judgment. The court ruled that the debtors' foreign representative failed to demonstrate that the debtors' COMI was in the BVI—either at the time of the filing of the liquidation or because of the liquidator's post-filing activities—or even that the debtors had an establishment in the BVI. Moreover, in so ruling, the court emphasized that "[f]rom beginning to end, . . . [the] tactics [of the debtors' principal] were a paradigmatic example of bad faith, and the [BVI] Liquidator's actions—and inaction—facilitated them."

Procedures and Recognition Under Chapter 15

Under chapter 15, the representative of a foreign debtor may file in a U.S. bankruptcy court a petition seeking "recognition" of a "foreign proceeding." "Foreign representative" is defined in section 101(24) of the Bankruptcy Code as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."

"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:

[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.

More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a "main" proceeding—a case pending in the country where the debtor's COMI is located—and "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment."

Section 1517 of the Bankruptcy Code provides that, subject to section 1506, after notice and a hearing, "an order recognizing a foreign proceeding shall be entered" if the proceeding qualifies as a foreign main or nonmain proceeding, the foreign representative is "a person or body," and the petition itself complies with the evidentiary requirements set forth in section 1515. Section 1506 states that "[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States."

If a U.S. bankruptcy court recognizes a foreign main proceeding under chapter 15, section 1520(a)(1) of the Bankruptcy Code provides that actions against the foreign debtor or "property of the debtor that is within the territorial jurisdiction of the United States" are stayed under section 362―the Bankruptcy Code's "automatic stay."

Following recognition of a foreign main or nonmain proceeding, section 1507 states that the bankruptcy court may also provide "additional assistance" to a foreign representative. This can include injunctive relief or authority to distribute the proceeds of all or part of the debtor's U.S. assets. However, under section 1507(b), in granting such relief, the court must consider, "consistent with the principles of comity," whether such assistance will reasonably ensure, among other things, the just treatment of creditors and other stakeholders, the protection of U.S. creditors against prejudice and inconvenience in pursuing their claims in the foreign...