Chapter 18 Introduction to Recognition under Chapter 15

• Jurisdiction: United States

18. Introduction to Recognition under Chapter 15

Written by:

Douglas E. Deutsch

Chadbourne & Parke LLP; New York

Francisco Vazquez

Chadbourne & Parke LLP; New York

Given the globalization of our economy, cross-border insolvencies and debt restructurings are becoming more commonplace. The Bankruptcy Code provides a mechanism to assist in the administration of such cross-border cases. Indeed, one of the key components of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was the addition of chapter 15 to the Bankruptcy Code.¹ Chapter 15, which is based on the United Nations Commission for International Trade Law (UNCITRAL) Model Law on Cross Border Insolvency (Model Law), was enacted to address certain objectives set forth in § 1501 of the Bankruptcy Code, including:

• cooperation between U.S. and foreign courts;
• greater legal certainty for trade and investment;
• fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested parties;
• protection and maximization of the value of the debtor's assets; and
• facilitation of the rescue of financially troubled businesses.

Several countries, including Mexico, Canada, Great Britain and Japan, have enacted legislation based on the Model Law.

According to the legislative history, chapter 15 was designed to be the "exclusive door to ancillary assistance to foreign proceedings" in the U.S. H.R. Rep. 109-031, 110 (2005). Although ancillary assistance can come in a variety of forms, the culmination of a chapter 15 case is generally "recognition." Indeed, chapter 15 functions through recognition of a foreign proceeding.² Given that U.S. courts are frequently called upon to assist in the administration of many foreign proceedings, it is crucial that new and younger lawyers are aware of chapter 15 and understand the basics of the recognition process.

A. The Chapter 15 Petition

A case under chapter 15 is commenced, like other bankruptcy cases, by the filing of a petition.³ Although a chapter 15 petition may look like any other bankruptcy petition, it has a much more limited effect than a chapter 7, 11 or 13 petition. For example, a chapter 15 petition is not an "order for relief and does not result in the imposition of the automatic stay. Moreover, the filing of a chapter 15 petition does not create a bankruptcy estate under § 541 of the Bankruptcy Code. A chapter 15 petition can be described as a request for "recognition," which is defined as "the entry of an order granting recognition of a foreign main proceeding or foreign nonmain proceeding."⁴ Nevertheless, a court may grant provisional relief upon the filing of a chapter 15 petition and before recognition if it is "urgently needed to protect the assets of the debtor or the interests of creditors."⁵ Substantive relief is usually reserved, however, until recognition of the foreign proceeding.⁶

B. Requirements for Recognition

Recognition of a foreign proceeding is relatively straightforward and indeed has been characterized as "formulaic."⁷ The requirements for recognition are set forth in § 1517 of the Bankruptcy Code. In particular, a foreign proceeding shall be recognized if (1) the foreign proceeding is a foreign main or foreign nonmain proceeding, (2) the petition for recognition was filed by a foreign representative and (3) the petition satisfies all of the requirements under § 1515. 11 U.S.C. § 1517. "By establishing a simple, objective eligibility requirement for recognition, Chapter 15 promotes predictability and reliability."⁸ Assuming all three criteria are satisfied, recognition should only be denied if recognition would be "manifestly contrary to the public policy of the United States."⁹

C. Definition of a Foreign Proceeding

A prerequisite for commencing a chapter 15 case is a "foreign proceeding." Under chapter 15, a foreign proceeding is defined 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."¹⁰ The definition includes both solvent and insolvent debtors.¹¹

The definition of foreign proceeding consists of the following key components: (i) a collective judicial proceeding, (ii) in which the assets and affairs of the debtor are subject to control or supervision by a foreign court, (iii) for the purpose of reorganization or liquidation and (iv) under a law relating to insolvency or adjustment of debt.¹² Courts have recognized foreign liquidations, administrations, bankruptcies, schemes of arrangement and company voluntary arrangements as foreign proceedings under chapter 15. A receivership, which is typically instituted at the request and for the benefit of a single secured creditor, however, would likely not qualify as a foreign proceeding given that it is not collective (i.e., does not consider the rights and obligations of creditors generally).

D. First Requirement: The Foreign Proceeding

In order to be eligible for recognition under chapter 15, a foreign proceeding must qualify as either a foreign "main" proceeding or a foreign "nonmain" proceeding. If the foreign proceeding is not foreign main or foreign nonmain, "a court should not grant recognition and is not authorized to use its power to effectuate the purposes of the foreign proceeding."¹³

1. Foreign Main Proceeding

A foreign main proceeding is defined as "a foreign proceeding pending in the country where the debtor has the center of its main interests."¹⁴ Chapter 15 does not define what constitutes a debtor's "center of main interests" (also known as "COMI").¹⁵ Chapter 15, however, provides that "in absence of evidence to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor's main interests."¹⁶ This presumption may be rebutted.¹⁷ The Bankruptcy Code, however, does not provide any guidance as to what evidence would be sufficient to rebut the presumption.¹⁸

U.S. Courts are required to consider chapter 15's international origins when called upon to interpret its provisions.¹⁹ Therefore, in analyzing COMI, U.S. courts have looked to the Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency, which explains that the COMI concept is derived from the European Convention on Insolvency Proceedings (EU Convention). Courts have noted that the regulation that adopted the EU Convention defines COMI as "the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties."²⁰ This concept has been equated with "principal place...