Chapter 15 Recognition Order And Relief Could Be Modified After Conversion Of Foreign Debtor's Reorganization To Liquidation

• Published date: 13 June 2023
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Ms Corinne Ball, Dan Moss, Isel Perez, Michael C. Schneidereit and Mark Douglas

Corporate restructurings are not always successful for many reasons. As a consequence, the bankruptcy and restructuring laws of the United States and many other countries recognize that a failed restructuring may be followed by a liquidation or winding-up of the company, either through the commencement of a separate liquidation or winding-up proceeding, or by the conversion of the restructuring to a liquidation. Chapter 15 of the Bankruptcy Code expressly contemplates that the status of a recognized foreign proceeding may change, and that a U.S. bankruptcy court presiding over a chapter 15 case has the power and flexibility to modify relief granted to a foreign representative as part of a chapter 15 case to account for such changed circumstances.

This concept was central to an unpublished ruling recently handed down by the U.S. Bankruptcy Court for the Southern District of New York. In In re Comair Ltd., 2023 WL 1971618 (Bankr. S.D.N.Y. Feb. 12, 2023), a debtor's South African "rescue proceeding" was converted to a liquidation, and the debtor's "rescue practitioners" were replaced with provisional liquidators. The liquidators then petitioned a U.S. bankruptcy court that had previously recognized the rescue proceeding under chapter 15 to amend the recognition order to recognize the liquidation, and to substitute them as the debtor's foreign representatives. The bankruptcy court granted the motion, ruling that: (i) no new chapter 15 case was necessary because the liquidation and the terminated rescue proceeding were "parts of one foreign proceeding" for purposes of chapter 15; and (ii) the provisional liquidators could be substituted for the rescue practitioners as the debtor's foreign representatives in the chapter 15 case.

Recognition of Foreign Bankruptcy Cases under Chapter 15

Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which has been enacted in some form by more than 50 countries.

Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts.

Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" 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."

The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).

"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.

A "collective proceeding" is a proceeding that considers the rights and obligations of creditors generally, rather than a proceeding instituted for the benefit of a single creditor or class of creditors. See Armada (Singapore) Pte Ltd. (In re Ashapura Minechem Ltd.), 480 B.R. 129, 136 (S.D.N.Y. 2012); In re British Am. Ins. Co., 425 B.R. 884, 902 (Bankr. S.D. Fla. 2010); In re Betcorp Ltd., 400 B.R. 266, 281 (Bankr. D. Nev. 2009).

Such a proceeding "contemplates the consideration and eventual treatment of claims of various types of creditors, as well as the possibility that creditors may take part in the foreign action." British American, 425 B.R. at 902. A collective proceeding is "designed to provide equitable treatment to creditors, by treating similarly situated creditors in the same way, and to maximize the value of the debtor's assets for the benefit of all creditors." Ashapura, 480 B.R. at 136-37 (citation omitted). Other hallmarks of a collective proceeding include adequate...