Vol 2 (2005) - Issue 4

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Chapter 15 of the US Bankruptcy Code: Some Observations from a UK Perspective

As readers will be aware from Selinda Melnik’s article in the previous issue of this journal, the US Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (‘BAPCPA’) will bring about substantial changes to the way that insolvency proceedings outside the United States will be recognized in the United States. These changes, enacted through the new Chapter 15 of the US Bankruptcy Code (the ‘Bankruptcy Code’) which comes into force on 17 October 2005, result from the incorporation of the UNCITRAL Model Law on Cross-Border Insolvency (the ‘Model Law’) into the Bankruptcy Code. Chapter 15 will replace section 304 of the Bankruptcy Code, which has assumed a vital place in the tool kit for dealing with non-US insolvencies and restructurings which have a US dimension. The purpose of this article is to consider, from a UK perspective, some of the challenges and opportunities which the move to Chapter 15 will present practitioners.

The new definition of ‘foreign proceeding’

For the purposes of section 304 of the Bankruptcy Code, a ‘foreign proceeding’ was widely defined and included any:

proceeding, whether judicial or administrative and whether or not under bankruptcy law ... for the purpose of liquidating an estate, adjusting debts by composition, extension or discharge, or effecting a reorganization.

The definition of ‘foreign proceeding’ under Chapter 15 is narrower (tracking the definition in the Model Law) and encompasses only:

collective judicial or administrative proceeding[s] ... 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.

The new requirement to have the assets and affairs of a debtor subject to court control or supervision could present a significant challenge for UK practitioners. Many debt restructurings in the UK are effected using schemes of arrangement or company voluntary arrangements (CVAs). A scheme of arrangement is a mechanism under which a debtor can effect a compromise with his creditors where a statutorily-defined majority of creditors votes in favour of such a compromise and the court sanctions the compromise, although it should be noted that the scheme of arrangement mechanism derives from UK corporate law (and indeed can be used to effect an arrangement with shareholders as well as with creditors) and not from UK bankruptcy/insolvency law. A CVA is an alternative mechanism (which does derive from UK bankruptcy/insolvency law) under which a debtor can make a compromise with his creditors where a statutorily-defined majority of creditors votes in favour of such a compromise (subject to a right for creditors to appeal to the court).
A shared feature of schemes of arrangement and CVAs is that they can be proposed by debtors without those debtors ever entering into any formal UK insolvency proceeding (such as administration or liquidation); in many cases the restructuring terms are proposed by the directors (although they can of course be proposed by administrators and liquidators).