Foreign Creditor Representative Wins Chapter 15 Recognition of Foreign Proceeding
May 13, 2008
Insolvency Notes
Bonnie Bolz Merkt
In response to the increasing complexity of cross-border restructurings and liquidations, a new chapter (Chapter 15) was added to the US Bankruptcy Code in 2005. Chapter 15 is meant to provide a framework for effectively and efficiently dealing with cross-border insolvency proceedings involving the United States by providing the representative of a foreign insolvency case with certain benefits and protections. In order for the representative of a foreign insolvency case to have access to these benefits and protections, however, the foreign insolvency case must be recognized by the US bankruptcy court. This entails, among other things, that the foreign insolvency case be a "foreign proceeding," the foreign proceeding be "pending" and the entity seeking recognition in the United States be a "foreign representative," as those terms are used in Chapter 15.1
Although there have been a number of reported decisions addressing various aspects of recognition, the decisions generally have not focused on these elements of recognition. Recently, however, the Bankruptcy Court for the Southern District of New York issued a decision in In re Oversight and Control Comm'n of Avánzit, S.A.2 that provides some useful guidance on interpreting the scope of "foreign proceeding," "pending," and "foreign representative."
In May 2002, Avánzit, S.A., a Spanish telecommunications company, filed a petition with a Spanish insolvency court seeking a suspensión de pagos (a suspension of payments). A suspensión de pagos is commenced by the debtor's filing of a petition with the insolvency court and the court's issuance of a commencement order, which results in, inter alia, the imposition of an automatic stay against litigation and collection efforts and the appointment of intervenores (trustees) who jointly manage the debtor's activities with its existing management. The purpose of a suspensión de pagos is to allow the debtor to negotiate a convenio (a repayment plan), which must be approved by a majority of creditors and ratified by the court. Once the court has approved the convenio, the automatic stay and other restrictions put in place by the commencement order are replaced by any limitations set forth in the convenio. A suspensión de pagos ends when the convenio has been fully consummated and the Spanish insolvency court has issued a closing order.
Following its approval of Avánzit's convenio in January 2004, the Spanish insolvency court established a committee of five members to act as representatives of Avánzit's creditors (the so-called Oversight Commission). Although the Oversight Commission had authority to supervise compliance with the convenio, it lacked any operational oversight rights, which had been restored to the company in connection with approval of the convenio.
In September 2007, the Oversight Commission requested authority from the Spanish insolvency court to file a Chapter 15 case in New York to recover $25 million which was the subject of litigation between Avánzit and a Peruvian bank, Banque Nacionale de Paris Paribas Andes, S.A. ("BNPP Andes") for distribution under Spanish law. The Spanish insolvency court granted the motion, declaring that Avánzit was still in a suspensión de pagos, that the Oversight Commission was a foreign representative, and that the Oversight Commission was authorized to file a Chapter 15 case in New York for purposes of recovering the $25 million. Two months later, the Oversight Commission filed with the Bankruptcy Court its petition for recognition of Avánzit's suspensión de pagos as a foreign main proceeding under Chapter 15 of the US Bankruptcy Code.
BNPP Andes sought to dismiss Avánzit's Chapter 15 petition on three grounds. First, it argued that Avánzit's suspensión de pagos did not qualify as a "foreign proceeding" within the meaning of the US Bankruptcy Code because, as part of the approval of the convenio, the court's restrictions on Avánzit had been lifted and operational oversight had been restored to the company. The Bankruptcy Court rejected BNPP Andes' first argument. Instead, the Bankruptcy Court found that, as the Spanish insolvency court continued to oversee the payment of claims under, and to settle disagreements concerning, the convenio, the Spanish insolvency court retained control over Avánzit's assets and affairs for the purpose of reorganization.
BNPP Andes next argued, on similar grounds, that Avánzit's suspensión de pagos did not warrant recognition because, after the approval of the convenio, it was no longer "pending," which BNPP Andes interpreted as referring to the stage of the proceeding. The Bankruptcy Court also rejected this argument. First, it held that the phrase "pending," as used in Sections 1502(4) and (5) of the US Bankruptcy Code, refers to the location, and not the stage, of the foreign proceeding. Second, it determined that, as with US bankruptcy cases in general, and Chapter 11 cases in particular, a suspensión de pagos remains open (or pending) until it is closed by the court's entry of a final decree, which had not yet occurred in Avánzit's case.
Finally, without much analysis, the Bankruptcy Court rejected BNPP Andes' argument that the Oversight Commission did not qualify as a "foreign representative." The Bankruptcy Court found that the Oversight Commission was authorized to administer the reorganization of the debtor's assets or affairs because it had been created to protect the interests of Avánzit's creditors and to assure compliance with the terms of the convenio. Alternatively, the Bankruptcy Court found that, pursuant to the September 2007 order of the Spanish insolvency court, the Oversight Commission had been authorized to represent the suspensión de pagos proceeding.
The Avánzit decision clarifies that a foreign proceeding may qualify for recognition under Chapter 15 even where daily operational control has been returned to the debtor's management. It also demonstrates that foreign representatives can now include creditor representatives, in addition to representatives of the debtor's estate, as long as they are properly authorized by a foreign court to administer a debtor's reorganization effort or act as a representative of a foreign proceeding. An interesting question, however, is whether courts may also attempt to employ the rationales used by the Bankruptcy Court in situations where, as is common in Chapter 11 proceedings, a new, separate legal entity (such as a liquidating trust with a liquidating trustee), rather than the debtor itself, is charged with making payments to creditors and collecting the assets necessary to do so.
Follow these links for additional articles from the May 13 2008 Insolvency Notes:
1 See 11 USC. §§ 101(23), 101(24), and 1502 (2008).
2 No. 07-13765, 200
This Alert may include links to websites other than the White & Case website. White & Case LLP has no responsibility for any websites other than its own, and does not endorse the information, content, presentation or accuracy, or make any warranty, express or implied, regarding any other website.
The White & Case Insolvency Notes is prepared for the general information of our clients and other interested persons. It should not be acted upon in any specific situation without appropriate legal advice.
This Alert is protected by copyright. Material appearing herein may be reproduced or translated with appropriate credit.
© 2008 White & Case LLP