Chapter 15 Recognition Order and Relief Could Be Modified After Conversion of Foreign Debtor's Reorganization to Liquidation
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This concept was central to an unpublished ruling recently handed down by the U.S. Bankruptcy Court for the Southern District of New York.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 notice to creditors, provisions for the distribution of assets in accordance with statutory priorities, and a mechanism for creditors to seek court review of developments. Id. at 137; In re ABC Learning Centers Ltd., 445 B.R. 318, 328-29 (Bankr. D. Del. 2010); British American, 425 B.R. at 902.
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 United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. § 1502(4))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c).
An "establishment" is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." Unlike with the determination of COMI, there is no statutory presumption regarding the determination of whether a foreign debtor has an establishment in any particular location. See British American, 425 B.R. at 91.
Pending its decision to grant or withhold recognition, the bankruptcy court, upon the request of a foreign representative, is authorized by section 1519 of the Bankruptcy Code to grant certain forms of provisional relief.
After recognition of a foreign proceeding, section 1521(a) authorizes the bankruptcy court, upon the request of the foreign representative, to grant a broad range of relief designed to preserve the foreign debtor's assets or otherwise to assist the court or other entity presiding over the debtor's foreign proceeding.
Modification or Termination of Chapter 15 Recognition or Other Relief
Section 1522(a) of the Bankruptcy Code provides that the bankruptcy court may grant relief under section 1519 or 1521, or may modify or terminate relief, but "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."
Under section 1522(c), "[t]he court may, at the request of a foreign representative or an entity affected by relief granted under section 1519 or 1521, or at its own motion, modify or terminate such relief."
Section 1506 of the Bankruptcy Code sets forth a public policy exception to the relief otherwise authorized in chapter 15, providing 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."
Section 1517(d) provides that "[t]he provisions of this chapter do not prevent 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," but before doing so, the court must "give due weight to possible prejudice to parties that have relied upon the order granting recognition." Section 1517(d) further provides that a chapter 15 case may be closed in the manner specified in section 350. Rule 5009(c) of the Federal Rules of Bankruptcy Procedure sets forth the requirements for closing a chapter 15 case after the foreign representative has filed a report detailing the results of his or her activities and stating that the case has been fully administered.
Relief under section 1517(d) is discretionary. See In re Loy, 448 B.R. 420, 438 (Bankr. E.D. Va. 2011) ("The actual language dictates that the subchapter's provisions 'do not prevent modification or termination,' which indicates that, although revisiting a recognition determination is not mandatory, it is within the Court's discretion to do so."). However, the provision limits the court's exercise of such discretion to cases where either: (i) the basis for recognition was flawed in some way; or (ii) the grounds for recognition have ceased to exist. See In re Cozumel Caribe, S.A. de C.V., 482 B.R. 96, 107 (Bankr. S.D.N.Y. 2012).
Section 1517(d) was patterned on Article 17(4) of the Model Law, which provides that "[t]he provisions of articles 15, 16, 17 and 18 [governing recognition of a foreign proceeding] do not prevent 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." Model Law Art. 17(4); see also In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325, 332 (S.,D.N.Y. 2008) (noting that the legislative history of section 1517(d) confirms that the provision "closely tracks article 17 of the Model Law, with a few exceptions").
Additional guidance regarding the meaning and application of section 1517(d) can be found in UNCITRAL's Guide to the Enactment and Interpretation of the Model Law, which provides that:
Modification or termination of the recognition decision may be a consequence of a change of circumstances after the decision on recognition, for instance, if the recognized foreign proceeding has been terminated or its nature has changed (e.g. a reorganization proceeding might be converted into a liquidation proceeding) or if the status of the foreign representative's appointment has changed or the appointment has been terminated.
See U.N. Comm'n on Int'l Trade. L., UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation (2014) § 165 (the "UNCITRAL Guide").
As noted by the bankruptcy court in In re Oi Brasil Holdings Coöperatief U.A., 578 B.R. 169 (Bankr. S.D.N.Y. 2017), appeal dismissed, 2020 WL 605930 (S.D.N.Y. Feb. 7, 2018), "[s]ection 1517(d) allow[s] courts to adjust their rulings based on changed circumstances, which exhibit[s] 'a policy that the recognition process remain flexible, taking into account the actual facts relevant to the court's decision rather than setting an arbitrary determination point.'" Id. at 203 (quoting British American, 425 B.R. at 910); accord Loy, 448 B.R. at 440 (stating that "recognition determinations are malleable, and, as facts warrant in a specific case, the court may revisit recognition"); In re Ernst & Young, Inc., 383 B.R. 773, 781 (Bankr. D. Colo. 2008) ("Chapter 15 allows the recognition determination to be modified or terminated in the future.").
To determine whether the grounds for granting chapter 15 recognition "have ceased to exist," the court "must examine what has changed since entry of the [recognition order]." Oi Brasil, 578 B.R. at 222. In doing so, the court "may consider new evidence and it is not limited to considering only the evidence that was or ought to have been available at the time the court granted recognition." Loy, 448 B.R. at 439.
Following chapter 15 recognition of a foreign proceeding, the court may dismiss or suspend all proceedings in the case if the interests of all stakeholders would be best served by such relief or "the purposes of chapter 15 … would be best served by such dismissal or suspension." 11 U.S.C. § 305(a); see also 11 U.S.C. § 1529(4) (authorizing a bankruptcy court, in attempting to coordinate a chapter 15 case or a foreign proceeding with a case filed under another chapter of the Bankruptcy Code, to "grant any of the relief authorized under section 305").
In May 2020, South African air carrier Comair Limited (the "debtor") commenced a Business Rescue Proceeding (the "Rescue Proceeding") to reorganize its operations in the High Court of South Africa (the "High Court") under the South African Companies Act of 2008. In connection with the filing, the debtor appointed two business rescue practitioners (the "BRPs"). In September 2020, the debtor's creditors approved a Rescue Plan for the debtor.
As the debtor's foreign representatives, the BRPs filed a petition in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") seeking recognition of the Rescue Proceeding under chapter 15 as a foreign main proceeding. The Bankruptcy Court granted the petition in April 2021. In November 2021, after being informed that the High Court had authorized the BRPs, among other things, to bring litigation on the debtor's behalf, the Bankruptcy Court authorized the BRPs to obtain discovery from an airplane manufacturer (the "Manufacturer") pursuant to section 1521(a)(4) of the Bankruptcy Code in connection with anticipated litigation over allegedly defective aircraft that were promised or delivered to the debtor.
In June 2022, upon being informed by the BRPs that there was no reasonable prospect for the debtor to be rescued, the High Court effectively ended the Rescue Proceeding and placed the debtor into provisional liquidation (the "Liquidation") under the Companies Act No. 61 of 1973 (the "1973 CA") and the Insolvency Act of 1936 (the "Insolvency Act"). Shortly afterward, the High Court appointed joint provisional liquidators for the debtor (the "JPLs").
Under South African law, a provisional liquidation proceeding is an interim proceeding that becomes a final liquidation upon the High Court's entry of a final liquidation order. Until the entry of such an order, the provisional liquidator may propose a "scheme of arrangement" for the debtor (i.e., a court-approved restructuring agreement between the debtor and its creditors).
If the High Court enters a final liquidation order, the court convenes a meeting of creditors, during which creditors can file their claims against the debtor and nominate final liquidators for the debtor. The final liquidators are entrusted with liquidating the debtor's assets and distributing the proceeds to creditors in accordance with statutory priorities. The 1973 CA and the Insolvency Act also give liquidators the power to commence and defend litigation and to take certain other actions on the debtor's behalf.
In July 2022, the JPLs filed a motion with the Bankruptcy Court for an order: (i) modifying the order recognizing the Rescue Proceeding to recognize the Liquidation under chapter 15 as a foreign main proceeding, and recognizing the JPLs as the debtor's foreign representatives; and (ii) substituting the JPLs for the BRPs in all matters pending before the Bankruptcy Court pursuant to Fed. R. Civ. P. 25(c) (made applicable to chapter 15 cases and "contested matters" by Fed. R. Bankr. P. 7025 and 9014(c)).
The Manufacturer objected to the motion. It argued that: (i) the JPLs were attempting to commence a new chapter 15 proceeding "under the guise of a purported 'amendment' to the [recognition order] without even attempting to satisfy the requirements [for recognition] under the Bankruptcy Code or the Bankruptcy Rules"; (ii) because the Rescue Proceeding recognized by the Bankruptcy Court was terminated long before the JPLs filed their motion and the BRPs no longer had any authority to act on the debtor's behalf, the relief that the BRPs had pursued on behalf of the debtor (including obtaining discovery) was also terminated; and (iii) the JPLs failed to demonstrate that the debtor needed chapter 15 relief to protect its business or assets, or to preserve the causes of action in the litigation filed by the JPLs against the Manufacturer on the debtor's behalf in the U.S. District Court for the Western District of Washington in February 2023 (the "Washington Litigation").
The Liquidation was still pending at the time the Bankruptcy Court ruled on the JPLs' motion.
The Bankruptcy Court's Ruling
The Bankruptcy Court granted the motion.
U.S. Bankruptcy Judge James L. Garrity, Jr. explained that, even though the High Court had entered an order terminating the Rescue Proceeding, the High Court still had jurisdiction over the debtor during the pendency of the Insolvency Proceeding, and "the only change affecting this Chapter 15 Case is that the High Court has authorized a new party to represent [the debtor] in the South African liquidation, thus effecting a change in the foreign representative." He accordingly concluded that there had "been no change in the identity of the foreign proceeding … [because the debtor] is still in an insolvency proceeding in South Africa under the Companies Act." Comair, 2023 WL 1971618, at *9. Judge Garrity further noted that the debtor remained under the control of court-appointed fiduciaries, a common practice in the United States and globally, "as insolvency regimes that allow for reorganization must (as a practical matter) include a mechanism for liquidating debtor companies that unsuccessfully attempt such a reorganization." Id.
Looking for guidance to the Model Law and the UNCITRAL Guide—which U.S. lawmakers relied on in enacting chapter 15, including section 1517(d) of the Bankruptcy Code—as well as U.S. court decisions interpreting sections 1517(d) and 1522(c), Judge Garrity agreed with the JPLs that there was only a "semantic difference" between the "termination" of a reorganization in favor of a liquidation and the "conversion" of a reorganization into a liquidation. "In either case," he wrote, "the two forms of the insolvency are coterminous—the reorganization ends where the liquidation begins." Id. at *11.
According to Judge Garrity, the UNCITRAL Guide specifically contemplates modification or termination of a recognition order "where 'a reorganization might be converted into a liquidation proceeding,' or where 'the status of the foreign representative's appointment has changed.'" Id. (quoting UNCITRAL Guide § 165). Moreover, he noted, two other bankruptcy judges in the Southern District of New York had previously modified chapter 15 recognition orders under section 1522(c) due to changes in circumstances, including the conversion of the debtors' "moratorium proceedings" to liquidations and an amendment to applicable foreign law requiring a change in the debtors' foreign representatives. Id. at *12 (citing In re Glitnir Banki HF, No. 08-14757 (SMB) (Bankr. S.D.N.Y.); In re Landsbanki Islands HF, No. 08-14921 (RDD) (Bankr. S.D.N.Y.)).
Judge Garrity accordingly found that the Rescue Proceeding and the Liquidation "are parts of one foreign proceeding" for purposes of chapter 15. Id. at *12. He further explained that "[f]undamentally, this case involves a functional transfer of controlling interest in [the debtor] from the BRPs to the JPLs," and even though South African law, unlike U.S. law, administratively creates a new proceeding when the High Court appoints a liquidator, "[t]he deliberately flexible nature of chapter 15 is designed to accommodate exactly this kind of minor administrative difference among international insolvency proceedings." Id. at *14 (citing Oi Brasil, 578 B.R. at 203).
Judge Garrity also concluded that, as the successors to the BRPs, the JPLs "are equally entitled to engage in discovery for the furtherance of [the debtor's] economic interests." Id. (citing Advanced Mktg. Grp., Inc. v. Bus. Payment Sys., LLC, 269 F.R.D. 355, 359 (S.D.N.Y. 2010)).
Next, despite finding that the Rescue Proceeding and the Liquidation were parts of one proceeding, Judge Garrity ruled that the Liquidation itself was entitled to chapter 15 recognition as a foreign main proceeding. Among other things, he found that: (i) the Liquidation was a collective judicial proceeding governed by the 1973 CA and the Insolvency Act, which are laws relating to the adjustment of debt; (ii) the Liquidation was a collective proceeding because all creditor claims would be resolved in accordance with those laws; (iii) the Liquidation was a foreign proceeding for the purpose of reorganization or liquidation within the meaning of section 101(23) of the Bankruptcy Code; (iv) the debtor's COMI was in South Africa, where the Liquidation was pending; (v) the JPLs qualified as the debtor's foreign representatives within the meaning of section 101(24) of the Bankruptcy Code; and (vi) the JPLs had submitted all the necessary documentation regarding the Liquidation and their appointment as the debtor's foreign representatives.
In addition, Judge Garrity concluded that the Manufacturer did not identify any public policy considerations that would warrant denial of recognition of the Liquidation in accordance with section 1506 of the Bankruptcy Code. He also ruled that the JPLs, as the BRPs' successors-in-interest, should be substituted for the BRPs as parties in the debtor's chapter 15 case, including for purposes of seeking discovery from the Manufacturer in the Washington Litigation, pursuant to Fed. R. Civ. P. 25. Id. at *19 (citing In re Stanford Int'l Bank Ltd., 2012 WL 13093940 (N.D. Tex. July 30, 2012) (applying Rule 25(c) to substitute a successor foreign representative for the debtor's original foreign representative)).
Finally, Judge Garrity rejected the Manufacturer's argument that, because Fed. R. Bankr. P. 5009(c) obligates a foreign representative to file a final report with the bankruptcy court when the "purpose of the representative's appearance in the court is completed," the BRPs, whose roles were "indisputably complete," were required to file such a report, after which the chapter 15 case should be dismissed. Judge Garrity declined to direct that the BRPs file such a report, finding that "the undisputed facts in the record do not support a conclusion that the Debtor's Chapter 15 Case is fully administered." Id. at *22.
The bankruptcy and restructuring laws of the United States and many other countries contemplate that a debtor's reorganization or restructuring proceeding may be converted to a winding-up or liquidation proceeding if the debtor cannot be restructured due to, among other things, changes in business circumstances or the debtor's inability to propose a restructuring plan that can be approved by creditors and the court. The key takeaway from Comair is that chapter 15, like the Model Law, was specifically designed so that courts have the power to tailor or modify relief granted in recognizing a foreign proceeding or in providing assistance to a foreign representative in response to such changed circumstances.
Fundamentally, the bankruptcy court in Comair deemed the Manufacturer's argument that a new chapter 15 petition was required to obtain recognition of what amounted to a converted restructuring case a waste of resources—for both the debtors and the courts—that would have been inconsistent with chapter 15's purpose in facilitating cross-border bankruptcy cases. The court also appeared to be skeptical of the Manufacturer's efforts to ward off or delay the foreign representatives' efforts to obtain discovery in the pending Washington litigation.
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