Vol 10 (2013) - Issue 4

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Chapter 15 of the United States Bankruptcy Code: A Very Brief Overview for Non-US Practitioners

The rise of a global economy has itself given rise to a very practical question: What happens when a business with cross-border debt, assets, and business relationships faces insolvency?
Where commercial insolvency is concerned, firms with cross-border business relationships face essentially the same issues as their domestic counterparts – but with one additional consideration. Unlike their domestic counterparts, cross-border firms operating under judicial protection while they reorganise or liquidate must also consider the question of how best to extend that protection as far as their business interests.
This very practical, economic question implicates a number of fundamental, philosophical ones: For example, should national borders afford some creditors of a cross-border firm a legal or judicial advantage over others? Should debtors be able to 'forum shop' in advance by registering or incorporating in debtor-friendly jurisdictions, or by 'parking' assets in jurisdictions beyond the reach of creditors?
An adequate discussion of the philosophy and policy underlying the daily realities of cross-border insolvency is well beyond the scope of this brief article. The following discussion instead seeks a far more modest goal: To trace the broad outlines of cross-border insolvency practice in one of the world’s leading insolvency jurisdictions – the US. More specifically, it will address the question of how US law and US Bankruptcy Courts treat the business interests of those insolvent debtors who are reorganising or liquidating beyond the reach of domestic US insolvency law.

The problem
American cross-border insolvency law is designed to address the following fundamental problem (illustrated by Figure 1):
A foreign (non-US) debtor, operating under judicial protection in an insolvency proceeding outside the US, needs to address claims, administer assets, or prosecute recoveries pending inside the US. How best to do this?

The solution
US law has recognised three primary routes to addressing this problem:
– The debtor (or its court-appointed representative) may commence an insolvency proceeding in the US, under US law (i.e., under Chapters 7 or 11 of the US Bankruptcy Code). For many firms seeking to reorganise, this approach has much to commend it: American bankruptcy law permits any (natural or corporate) 'person' with 'domicile, place of business or property’ in the US to be a debtor under the Bankruptcy Code. The broad applicability of US insolvency law, combined with its generally 'debtor-friendly' provisions, have made the US a ‘forum of choice' for many debtors otherwise operating or headquartered outside the US.
But the benefits of American insolvency law are not without commensurate burdens. First, US bankruptcy proceedings are notoriously costly. Second, they are frequently cumbersome in terms of the regulatory compliance imposed by the US Department of Justice, operating through the Office of the United States Trustee. And third, some firms may find it otherwise tactically advantageous to remain outside the US.