Vol 8 (2011) - Issue 3

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Use of US Chapter 11 Filings by Non–US Corporations: Realistic Option or Non–Starter?

From a US perspective, Chapter 11 is seen as the model for a court-supervised business restructuring and indeed, based on the Chapter 11 'look-alikes' being established in a number of other countries – for example the CCAA process in Canada, self-administration (Eigenverwaltung) in Germany, Sauvegarde in France – it seems to be setting the pattern for the development of more recovery-focused insolvency processes worldwide. However, from the perspective of the non-US corporation, a Chapter 11 filing is not top of the list of options; in fact, the thought of putting the future of your corporation in the hands of a judge in, for example, Delaware or the Southern District of New York, is probably viewed with some suspicion, if not as being absurd. This article examines some of the advantages and pitfalls of Chapter 11 for a non-US corporation. It is certainly not the universal solution, but by no means one to be rejected out of hand.



Approaches

The US Congress had made it clear in the relevant provisions of the Bankruptcy Code that a foreign corporation was eligible in the first instance to begin a case under Chapter 11 as long as it had property or an office in the US. Moreover, it is an option that is available whether the non-US corporation intends to file for insolvency in its country of domicile or not.

There are several options/variants to consider:

– A local filing in the country of domicile or Centre of Main Interest (COMI) coupled with an application by the local office holder for recognition in the US under Chapter 15 of the US Bankruptcy Code – the norm where there are assets and claims to protect or deal with in the US.

– A main filing in the local COMI together with a US secondary filing – where there are substantial assets and claims in the US, this may be more appropriate or convenient than a simple Chapter 15 recognition. However, the burden and high cost of a Chapter 11 filing may often favour settling for Chapter 15, unless there are compelling advantages associated with a full supporting US filing, which is fairly unlikely.

– Chapter 11 with recognition obtained in the other jurisdictions due to the adoption of the UNCITRAL Model Law or because the system allows for recognition of foreign office holders (eg in the Commonwealth countries).

– A main Chapter 11 filing:

– free-standing (as for example, among several others, the Avianca and Truvo cases discussed below); or

– in parallel main filings (as Federal-Mogul, in this instance combined Chapter 11 and UK administration); or finally

– together with local supplementary filing(s).



Illustrative cases

The Avianca case in 2003/4 was the definitive test of whether a non-US-based multinational enterprise could restructure solely under Chapter 11 of the US Bankruptcy Code, without the benefit or burden of starting any insolvency procedure whatsoever in its country of domicile. The answer was a clear yes, but the case highlighted the following key issues:

– Due to the practical limitation on the ability of the US Court to impose an automatic stay in other jurisdictions, the need to agree in advance of filing (or be able to impose – see Truvo below) a voluntary stay to creditors’ claims and proceedings in the home country (and in any other jurisdictions with significant creditors or claims).

– The need for a mechanism to deal with exceptions in the local jurisdiction (payment of selected local creditors) acceptable to creditors participating in the US proceedings or to obtain the necessary approval from the US Bankruptcy Court.