Vol 11 (2014) - Issue 1

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ABC Learning: The ABC of Chapter 15 is to Rely on Its Plain Meaning

In its first decision in a chapter 15 matter, the United States Court of Appeals for the Third Circuit ('Court of Appeals') found that (i) an Australian liquidation proceeding was eligible for recognition as main foreign proceeding under chapter 15, even if a concurrent receivership that effectively controlled all the debtor’s assets did not meet requirements for recognition, and (ii) the automatic stay protected the foreign debtor’s assets located in the United States, even when they were fully encumbered.

I. Background
ABC Learning Centres Ltd. ('ABC') is a publicly traded Australian company that provided child care and educational services in Australia and other countries. In November 2008, ABC directors entered into voluntary administration under Australian law, pursuant to which administrators were appointed to determine whether the company could be reorganised, or whether liquidation was necessary. The initiation of voluntary administration proceedings breached ABC’s loan agreements with its secured creditors and triggered their right to initiate a receivership process to realise their assets. Notably, all ABC’s assets were encumbered by the secured creditors’ liens. On 2 June 2010, ABC’s directors decided to enter into liquidation and appointed two liquidators to wind up the company. The liquidation and the receivership ran concurrently. In the United States, the company operated through its subsidiaries, ABC Developmental Learning Centres (USA) Inc. ('ABC Delaware') and the Learning Care Group. In June 2008, ABC Delaware contracted with RCS Capital Development LLC ('RCS') to develop child care facilities in the United States. Subsequently, RCS sued ABC Delaware on a breach of contract claim in Arizona state court, and won a USD 47 million verdict on 14 May 2010 ('Arizona Verdict'). In another lawsuit, pending in Nevada, ABC and ABC Delaware sued RCS for USD 30 million ('Nevada Lawsuit').
On 26 May 2010, before the Arizona Verdict was rendered into judgment, the liquidators filed a petition for recognition under chapter 15 in the United States Bankruptcy Court for the District of Delaware (the 'Bankruptcy Court'). The Bankruptcy Court granted recognition of the Australian liquidation as foreign main proceeding and imposed the automatic stay of actions against ABC and its property in the United States, which was modified to allow RCS to render the Arizona Verdict into judgment and apply it as a defence in the Nevada Lawsuit. RCS appealed the recognition, but the district court upheld the Bankruptcy Court’s orders. RCS further appealed to the Court of Appeals.

II. A foreign liquidation proceeding is not precluded from recognition as foreign main proceeding merely because secured creditors may realise their interest through a separate proceeding that does not meet requirements for recognition
Under Australian law, receivership and liquidation can proceed at the same time. While receivership realises assets for the benefit of secured creditors only, liquidators represent the interests of all creditors and distribute any assets available after secured creditors have been made whole. However, the two proceedings are not completely independent one from the other. The liquidator may (i) review the appointment of the receiver; (ii) monitor the progress of receivership; and (iii) investigate and challenge secured creditors’ claims. In addition, receivership is not mandatory: secured creditors can elect to surrender secured assets to liquidators and participate in distributions through the liquidation. Whether secured assets are realised in the receivership or liquidation, any surplus realised above the amount of debt owed to secured creditors is available for distribution to the unsecured creditors.