Vol 2 (2005) - Issue 5

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In re Rose and the Limitations on Foreign Proceedings Entitled to Relief Under US Laws Governing Cross-Border Insolvencies

A principal difficulty inherent in drafting a statute to govern cross-border insolvencies is identifying the types of foreign proceedings that are entitled to relief under the statute. Such relief typically involves nationwide injunctions prohibiting the commencement or continuation of actions or enforcement of judgments against the debtor-entity subject to the foreign proceeding, orders requiring the turnover of assets of the debtor-entity, and any other appropriate protections in furtherance of the foreign proceeding. In most cases, relief granted to entities subject to cross-border insolvency proceedings is far greater in scope than could be achieved through any non-bankruptcy appeal for comity, and is therefore often critical to the success of the foreign proceeding. If the types of foreign proceedings permitted to seek relief under a cross-border insolvency law are defined too narrowly, it will fail to account for the diversity of international law. If they are defined too broadly, the law will provide greater relief to foreign corporations than to their domestic counterparts. This tension often results in vague statutes that, for practical purposes, pass the problem onto the courts to decide.
In the recent case of In re Rose, a US bankruptcy court examined the limitations on the types of cases entitled to recognition and protection under section 304 of the US Bankruptcy Code (the ‘Bankruptcy Code’). Though section 304 will soon be replaced with the new chapter 15 of the Bankruptcy Code (the US enactment of the United Nations Commission on International Trade Law’s Model Law on Cross-Border Insolvency), the court’s decision in In re Rose foreshadows issues certain to arise under chapter 15.

The factual background of In re Rose

In re Rose involved thirteen subsidiaries of the Aviva Group. All thirteen subsidiaries were solvent insurance providers that wrote a wide variety of general insurance and reinsurance policies in the London subscription market. To eliminate administrative, financial, and regulatory inefficiencies, the subsidiaries had commenced a proceeding under Part VII of the United Kingdom Financial Services And Markets Act 2000 in the High Court of Justice in England (the ‘English Proceeding’). As part of the English Proceeding, the High Court approved a transfer scheme (the ‘Transfer Scheme’) whereby most, but not all, of the assets and liabilities of twelve of the subsidiaries (the ‘Transferor Subsidiaries’) would be transferred to the thirteenth subsidiary (the ‘Transferee Subsidiary’). Following the completion of the Transfer Scheme, the Transferor Subsidiaries would be deregulated and liquidated.
On 18 March 2004, a representative of the Subsidiaries (‘Mr. Rose’) filed a petition under section 304 of the Bankruptcy Code seeking a permanent injunction to prevent creditors from collaterally attacking the Transfer Scheme by bringing law suits against the subsidiaries in the United States.
In its order dated 29 December 2004, the US Bankruptcy Court for the Southern District of New York (Judge Prudence Beatty) rejected Mr. Rose’s request for an injunction, holding that the subsidiaries’ reorganization pursuant to the Transfer Scheme did not qualify as a proceeding entitling the subsidiaries to relief under section 304.