Australian Voluntary Winding-Up Recognized Under Chapter 15 of the Bankruptcy Code
On February 9, 2009, the U.S. Bankruptcy Court for the District of Nevada issued an order in In re Betcorp Ltd. recognizing the voluntary winding-up proceeding of an Australian company as a “foreign main proceeding” under chapter 15 of the Bankruptcy Code. The ruling is of broader interest in the present economic environment because it provides guidance on several important cross-border insolvency issues that may arise in the U.S. and other countries that have adopted the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), after which chapter 15 of the U.S. Bankruptcy Code is patterned.
Subsequently, 1st Technology, an American technology company, filed proceedings against Betcorp in a U.S. district court claiming that Betcorp had infringed one of its patents. In response, the Australian liquidators of Betcorp filed a chapter 15 petition in the U.S. seeking to have the Australian winding-up process recognized as a “foreign main proceeding” under chapter 15 of the Bankruptcy Code. Recognition under chapter 15 would force 1st Technology to pursue its patent infringement claim in an Australian court because all U.S. litigation against Betcorp would be stayed.
Neither the Bankruptcy Code nor the Model Law defines “COMI.” However, section 1516(c) of the Bankruptcy Code provides that the debtor’s registered office or habitual residence, in the case of an individual, is presumed to be the debtor’s COMI. According to the statute’s legislative history, this presumption was included “for speed and convenience of proof where there is no serious controversy.” An “establishment” is defined to be “any place of operations where the debtor carries out a nontransitory economic activity.”
In determining Betcorp’s COMI, Judge Markell applied the approach utilized by the U.S. district court in its May 2008 ruling in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. In affirming the bankruptcy court’s decision in Bear Stearns, the district court listed several factors relevant to the determination of the COMI: namely, the location of the debtor’s headquarters, the location of those who actually manage the debtor (which conceivably could be the headquarters of a holding company), the location of the majority of the debtor’s creditors or of a majority of the creditors who would be affected by the case, and/or the jurisdiction whose law would apply to most disputes.
Of these factors, the only one suggesting that Betcorp’s COMI may have been located somewhere other than Australia was the fact that Betcorp’s main creditors were located in the U.K. and the U.S. Although this was sufficient to rebut the presumption with respect to the location of the COMI, it was not enough to outweigh the factors, described below, that prompted the Betcorp court to conclude that Betcorp’s COMI was located in Australia:
The conclusion of the court that a voluntary winding-up process (which does not involve any court supervision) is a “proceeding” for the purposes of the Bankruptcy Code (and, by extension, the Model Law) provides authority for the proposition that other forms of non-court-sanctioned external administration of a company qualify as “proceedings,” so long as the process at issue is undertaken in accordance with a statutory framework. Most relevant in the Australian context, this means that the voluntary administration process (a largely extrajudicial rough equivalent of chapter 11 of the Bankruptcy Code) is likely to be a “proceeding” for the purposes of chapter 15. In addition, the court’s analysis of Betcorp’s COMI adds to a growing body of jurisprudence that sheds light on how this issue is to be determined.
How Did the Proceeding Arise?
Betcorp Limited (In Liquidation) (“Betcorp”) is an online gambling company that commenced operations in Australia in 1998. It later expanded its operations to the U.S., and those operations became central to Betcorp’s overall operations. The enactment of the Unlawful Internet Gambling Enforcement Act (2006 – USC), which prevented Betcorp from receiving fund transfers related to gaming activities from U.S. consumers, was a major impediment to the ongoing viability of Betcorp’s U.S. operations and eventually forced Betcorp to cease all of its U.S. operations. At a meeting in September 2007, shareholders in Australia voted to put Betcorp into a voluntary winding-up pursuant to Part 5 of Australia’s Corporations Act 2001 (Cth) (the “Act”), and liquidators were appointed.
Subsequently, 1st Technology, an American technology company, filed proceedings against Betcorp in a U.S. district court claiming that Betcorp had infringed one of its patents. In response, the Australian liquidators of Betcorp filed a chapter 15 petition in the U.S. seeking to have the Australian winding-up process recognized as a “foreign main proceeding” under chapter 15 of the Bankruptcy Code. Recognition under chapter 15 would force 1st Technology to pursue its patent infringement claim in an Australian court because all U.S. litigation against Betcorp would be stayed.
The Issues Before the Bankruptcy Court
Bankruptcy Judge Markell determined two main issues in ruling on the application for recognition:
1. Whether Betcorp’s voluntary winding-up constitutes a “foreign proceeding” for the purposes of the Bankruptcy Code;
2. If so, whether Betcorp’s winding-up proceeding is a “foreign main proceeding.”
What Is a "Foreign Proceeding"?
In relation to the first issue, 1st Technology submitted that the voluntary winding-up of Betcorp under Part 5 of the Act was not a “foreign proceeding” under chapter 15 because, as a voluntary process, it did not involve the making of an application to a court. The term “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.
Judge Markell, consistent with the purpose of chapter 15 and the Model Law (upon which chapter 15 is based), held that “proceeding” was to be broadly interpreted to include “a statutory framework that constrains a company’s actions and that regulates the final distribution of a company’s assets.” In this case, he concluded, “that framework is provided by the [Act].” Accordingly, the voluntary winding-up, having been undertaken in accordance with the provisions of the Act, was a “foreign proceeding” for the purposes of chapter 15, regardless of the fact that no application to a court was necessary to initiate the winding-up.
Was the Proceeding a “Foreign Main Proceeding”?
The next question for the court was whether the proceeding to voluntarily wind up Betcorp was a “foreign main proceeding” under chapter 15. Because more than one bankruptcy or insolvency proceeding may be pending against the same foreign debtor in different countries, chapter 15 contemplates recognition in the U.S. of both a foreign “main” proceeding—a case pending in whatever country contains the debtor’s “center of main interests” (“COMI”)—and foreign “nonmain” proceedings, which may have been commenced in countries where the debtor merely has an “establishment.”
Neither the Bankruptcy Code nor the Model Law defines “COMI.” However, section 1516(c) of the Bankruptcy Code provides that the debtor’s registered office or habitual residence, in the case of an individual, is presumed to be the debtor’s COMI. According to the statute’s legislative history, this presumption was included “for speed and convenience of proof where there is no serious controversy.” An “establishment” is defined to be “any place of operations where the debtor carries out a nontransitory economic activity.”
In determining Betcorp’s COMI, Judge Markell applied the approach utilized by the U.S. district court in its May 2008 ruling in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. In affirming the bankruptcy court’s decision in Bear Stearns, the district court listed several factors relevant to the determination of the COMI: namely, the location of the debtor’s headquarters, the location of those who actually manage the debtor (which conceivably could be the headquarters of a holding company), the location of the majority of the debtor’s creditors or of a majority of the creditors who would be affected by the case, and/or the jurisdiction whose law would apply to most disputes.
Of these factors, the only one suggesting that Betcorp’s COMI may have been located somewhere other than Australia was the fact that Betcorp’s main creditors were located in the U.K. and the U.S. Although this was sufficient to rebut the presumption with respect to the location of the COMI, it was not enough to outweigh the factors, described below, that prompted the Betcorp court to conclude that Betcorp’s COMI was located in Australia:
- Betcorp’s registered office and headquarters were in Australia;
- Australia was the place where the winding-up was being administered pursuant to Australian law, and those laws would determine any disputes;
- The company’s liquidators were located in Australia;
- Betcorp’s management was, by and large, conducted from Australia; and
- Betcorp’s only asset was cash held in an Australian bank account.
On the basis of this evidence, the court held that Betcorp’s COMI was located in Australia and that the voluntary liquidation process should be recognized as a “foreign main proceeding” under chapter 15. Upon recognition of Betcorp’s winding-up under chapter 15, 1st Technology’s district court litigation was stayed by operation of section 1520 of the Bankruptcy Code, which provides that the automatic stay imposed by section 362 applies to a debtor and its assets upon recognition of a foreign main proceeding.
The Significance of the Betcorp Decision
The Betcorp decision provides some useful guidance on the meaning of “foreign proceeding” and “COMI,” which terms are relevant not only to applications under chapter 15 of the U.S. Bankruptcy Code, but also to applications under other versions of the Model Law enacted by other nations (including Australia, which implemented the Model Law when it enacted the Cross-Border Insolvency Act in 2008).
The conclusion of the court that a voluntary winding-up process (which does not involve any court supervision) is a “proceeding” for the purposes of the Bankruptcy Code (and, by extension, the Model Law) provides authority for the proposition that other forms of non-court-sanctioned external administration of a company qualify as “proceedings,” so long as the process at issue is undertaken in accordance with a statutory framework. Most relevant in the Australian context, this means that the voluntary administration process (a largely extrajudicial rough equivalent of chapter 11 of the Bankruptcy Code) is likely to be a “proceeding” for the purposes of chapter 15. In addition, the court’s analysis of Betcorp’s COMI adds to a growing body of jurisprudence that sheds light on how this issue is to be determined.
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In re Betcorp Ltd., 400 B.R. 266 (Bankr. D. Nev. 2009).
In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325 (S.D.N.Y. 2008).
