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Global rules on foreign direct investment (FDI)
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Chapter 15 of the United States Bankruptcy Code implements the Model Law on Cross-Border Insolvency in the US, and provides “effective mechanisms for dealing with cases of cross-border insolvency.” Chapter 15 and the Model Law accomplish this goal by providing a procedure for granting recognition to a “foreign proceeding” and other relief to a “foreign representative.” The US Bankruptcy Code contains specific definitions for both terms, which are discussed in greater detail below, but they generally refer to foreign insolvency, bankruptcy, liquidation, or debt-restructuring proceedings pending outside the US and the individuals or entities that are entrusted with their administration, respectively.
In 2023, there were forty nine new Chapter 15 petitions filed in the US for orders recognizing foreign proceedings pending in a number of different jurisdictions across the globe: Bermuda, Brazil, British Virgin Islands, Canada, Cayman Islands, Denmark, England, Germany, Hong Kong, Isle of Man, Italy, The Netherlands, New Zealand, Poland, Russia, Scotland, South Africa, United Kingdom, and Ukraine. The majority of these cases were filed in the Southern District of New York (16), Southern District of Florida (10), and District of Delaware (10). The remaining thirteen cases were filed across seven other districts.
US courts issued several decisions in 2023 analyzing important issues in Chapter 15. This article highlights a handful of the most significant decisions. First, we discuss a decision that confirms that a foreign court’s appointment is not required for a person or an entity to be a foreign representative under Chapter 15. Next, we examine a decision that concludes that a new Chapter 15 case is not required to be filed after a recognized reorganization proceeding is converted to liquidation. We turn to a decision that highlights the potential consequence of a foreign representative failing to comply with its obligation to inform a US court of developments in the foreign proceeding. We then tackle interesting decisions that address the availability of discovery to creditors and other interested parties under Chapter 15. Finally, we round out the survey with a review of two decisions that analyze the appealability of Chapter 15 discovery orders.
One of the conditions precedent to recognition of a foreign proceeding under Chapter 15 is that “the foreign representative applying for recognition is a person or body.” The status of a foreign representative is rarely contested where it is appointed by a foreign court. However, nothing in the Bankruptcy Code mandates court appointment. In certain circumstances, a debtor may appoint a foreign representative for purposes of seeking Chapter 15 relief. In 2023, the US Bankruptcy Court for the Southern District of New York confirmed that principle when it overruled a creditor’s objection to recognition of a Bulgarian bankruptcy proceeding. In re Agro Santino, OOD, 653 B.R. 79 (Bankr. S.D.N.Y. 2023).
Agro Santino OOD (“Agro”) is a Bulgarian limited liability company that was a defendant in certain litigation in the US. Prior to trial, a Bulgarian court opened a bankruptcy proceeding and appointed a trustee for Agro. Under Bulgarian law, Agro was generally allowed to continue to operate under the trustee’s supervision. Agro, by its sole manager, appointed a different person (“Ms. Panchovska”) to serve as its foreign representative. Agro informed the trustee of such appointment, but never obtained the trustee’s consent. Following her appointment, Ms. Panchovska filed a Chapter 15 petition seeking recognition of Agro’s Bulgarian bankruptcy case as a foreign main proceeding with the New York bankruptcy court. Upon recognition of the Bulgarian bankruptcy case, the US litigation would be automatically stayed.
StoneX Markets LLC (“StoneX”), the plaintiff in the US litigation and Agro’s largest creditor, opposed recognition, arguing that Agro had failed to prove that Ms. Panchovska was qualified to serve as the foreign representative under Bulgarian law. StoneX emphasized that, under Bulgarian law, a debtor “may conclude new transactions” only with the trustee’s consent. According to StoneX, Ms. Panchovska’s appointment was a new transaction that required the trustee’s prior approval, which Agro never obtained.
Citing existing case-law, the New York bankruptcy court found that the appointment of a foreign representative is not governed by foreign law. Instead, it is governed by section 101(24) of the US Bankruptcy Code, which defines a foreign representative as “a person or body…authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.” That section does not require that a foreign representative be appointed in accordance with foreign law or by a foreign court. According to the bankruptcy court, that section authorizes the appointment of a foreign representative by a debtor in certain circumstances and should be interpreted broadly to facilitate the purposes of Chapter 15.
Here, according to the New York bankruptcy court, Agro was functioning like a traditional “debtor in possession” in that it retained control of its operations. Indeed, Agro’s trustee confirmed that Agro was generally in control of its affairs in a letter to Argo’s sole manager. Because Agro was authorized to manage its affairs, it could (as it did) appoint Ms. Panchovska as its foreign representative by executing a power of attorney. Thus, according to the bankruptcy court, the appointment of Ms. Panchovska as a foreign representative satisfied the section 101(24) definition. The court further noted that the Bulgarian court was aware of the Chapter 15 case and Ms. Panchovska’s appointment, but had not taken any action to enjoin or otherwise affect Ms. Panchovska’s appointment. According to the court, this fact “lends further credence” to the court’s conclusion that Argo had the authority to appoint the foreign representative.
In coming to its conclusion, the bankruptcy court emphasized that it was not opining on Bulgarian law, specifically whether the appointment was a new transaction that required the trustee’s consent. According to the bankruptcy court, that was an issue that the Bulgarian court was best suited to address. The bankruptcy court nevertheless noted that the appointment of a foreign representative was likely not a new transaction under Bulgarian law. Moreover, to the extent it was a new transaction, the bankruptcy court determined that the trustee’s approval was likely only required if the debtor was going to pay Ms. Panchovska’s fees, which was not the situation here as a creditor had agreed to pay her. The bankruptcy court further noted that its conclusion that Agro was authorized to appoint the foreign representative was bolstered by the lack of action from the trustee to challenge Ms. Panchovska’s appointment. Ultimately, the court granted Ms. Panchovska’s Chapter 15 petition and recognized the Bulgarian bankruptcy case as a foreign main proceeding, resulting in a stay of the US litigation.
Following the filing of a Chapter 15 petition, a foreign representative is obligated to inform the US court as to “any substantial change” in the status of the foreign proceeding. Like a US Chapter 11 case, a foreign restructuring may be converted to a liquidation. When that happens, the foreign representative is obliged to inform the US court. However, the Bankruptcy Code is silent as to the process for obtaining recognition of a converted foreign proceeding. Faced with a request by provisional liquidators to amend a prior order recognizing a South African restructuring, the US Bankruptcy Court for the Southern District of New York held that the provisional liquidators did not have to file a new Chapter 15 petition. Instead, the court held that it could amend its prior order to recognize the liquidation, and substitute the newly appointed provisional liquidators for the previously-recognized “Business Rescue Practitioners” (BRPs) in a pending discovery dispute. See In re Comair Ltd, Case No. 21-10208, 2023 WL 1971618 (Bankr. S.D.N.Y. Feb. 12, 2023).
Comair Ltd. is a commercial airline that was in a reorganization proceeding before the High Court of South Africa. Following approval of a rescue plan by the South African court, the New York bankruptcy court issued an order granting recognition of (1) the South African reorganization as a foreign main proceeding, and (2) Comair’s BRPs, who were entrusted with developing a business rescue plan, as the foreign representatives. In addition, the New York bankruptcy court allowed the BRPs to take discovery from an aircraft manufacturer.
As a result of, among other things, COVID-19 related restrictions and rising fuel prices, the BRPs concluded that Comair could not survive as a going concern. Consequently, the BRPs requested, an order from the High Court discontinuing the rescue proceeding and placing Comair into liquidation. The High Court granted that request and appointed joint provisional liquidators to administer Comair’s liquidation (the “JPLs”). The High Court also authorized the JPLs to bring legal proceedings on behalf of Comair and to request an amendment of the New York court’s recognition order.
In accordance with the authority conferred by the High Court, the JPLS filed a motion with the New York court for an order modifying its prior orders to (1) recognize Comair’s liquidation as a foreign main proceeding, (2) recognize the JPLs as the foreign representatives, and (3) substitute the JPLs for the BRPs in matters before the New York court, namely in the discovery order. The aircraft manufacturer opposed the motion, arguing that the liquidation is a different proceeding than the business rescue proceeding. Accordingly, the manufacturer argued that the JPLs must file a new Chapter 15 petition for recognition of the liquidation and separately justify the request for discovery that was previously granted to the BRPs. The New York court was unpersuaded by the manufacturer’s arguments.
Section 101(23) of the Bankruptcy Code defines a foreign proceeding as a “collective judicial or administrative proceeding in a foreign country…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 of a foreign court, for the purpose of reorganization or liquidation.” The New York court found (as advocated by the JPLs) that the “South African business rescue proceeding and the liquidation are parts of one foreign proceeding.” Indeed, by necessity, according to the New York court, a reorganization proceeding must permit liquidation of a company that is unsuccessful in its reorganization efforts. Here, the only material difference between the liquidation and the rescue proceeding is the replacement of the BRPs with the JPLs, and that was insufficient to find that they were separate proceedings. “The deliberately flexible nature of Chapter 15 is designed to accommodate exactly this kind of administrative difference among international insolvency proceedings.”
Having concluded that the liquidation was a continuation of the business rescues proceeding, the New York court conducted a “fresh analysis” of the liquidation to ensure that it satisfied the requirements of Chapter 15. In particular, it concluded that (1) the liquidation was a foreign main proceeding (i.e., pending in Comair’s center of main interests), and (2) the JPLs were the foreign representatives. The court further concluded that the JPLs satisfied the procedural and evidentiary requirements of Chapter 15 by, among other things, filing a copy of the order placing Comair into liquidation and appointing the JPLs. Moreover, recognition of the liquidation would not be manifestly contrary to US public policy.
In addition to modifying its prior recognition order to provide for recognition of the liquidation and the JPLs, the New York court modified the discovery order to permit the JPLs to continue pursuing discovery from the aircraft manufacturer. The court was satisfied that substitution of the JPLs for the BRPs was appropriate under Rule 25(c) of the Federal Rules of Civil Procedure, which permits the substitution of parties in an action if an interest is transferred. Here, because BRP’s interest in investigating claims and in the discovery was transferred to the JPLs and the JPLs replaced the BRPs as Comair’s fiduciary, the court authorized the JPLs to obtain discovery from the manufacturer. Accordingly, the New York court modified its prior order and recognized the liquidation as a foreign main proceeding, and the JPLs as the foreign representative, and authorized them to seek discovery without requiring them to file a new Chapter 15 case.
As noted above, a foreign representative is required to inform the US court in a Chapter 15 case of any “substantial change” in the status of the foreign proceeding or the foreign representative’s appointment. Last year, a bankruptcy court barred a foreign representative from appearing before it because the foreign representative failed to inform the court of key developments in the foreign proceeding. See In re Ace Track Co., Ltd., 647 B.R. 919 (Bankr. N.D. Ill. 2023).1
Ace Track Co. Ltd. was a debtor in a rehabilitation proceeding in the Republic of Korea. Upon the request of the foreign representative, the US Bankruptcy Court for the Northern District of Illinois issued an order recognizing the Korean proceeding as a foreign main proceeding under Chapter 15. After nearly five years without activity in the Chapter 15 case, US counsel for the foreign representative filed motion to withdraw as counsel on the basis that there had been no contact with the foreign representative. Thereafter, the Illinois bankruptcy court contacted the Korean court and learned that the Korean court had approved a restructuring plan for Ace Track in 2015 and terminated the Korean proceeding in 2018.
Given the status of the Korean proceeding and lack of information from the foreign representative, the Illinois court scheduled a hearing to consider, among other things, entry of an order closing the Chapter 15 case and barring the foreign representative from appearing as a foreign representative in future Chapter 15 cases. The foreign representative did not appear at the hearing. Finding that the foreign representative failed to fulfill its duty to inform, the Illinois court barred the foreign representative from acting as a foreign representative before the Bankruptcy Court until it demonstrates that “he understands and will abide by his obligations to this court as petitioner in matters before it.” In addition, the court closed the Chapter 15 case given that the Korean proceeding had previously been terminated.
Chapter 15 provides that a foreign representative may obtain discovery “concerning a debtor’s assets, affairs, rights, obligations, or liabilities.” See 11 U.S.C. §1521(a)(4). Chapter 15, however, is silent as to the ability of a creditor or other party to obtain discovery in a Chapter 15 case. Consequently, foreign representatives have opposed discovery requests from creditors and other parties, arguing that they were not entitled to discovery under Chapter 15. Last year, two bankruptcy courts considering the issue determined that (in at least some instances) creditors may be entitled to discovery aimed at a foreign representative or relevant third parties.
In the Chapter 15 case of In re Golden Sphinx Ltd., Case No. 22-14320, 2023 WL 2823391 (Bankr. C.D. Calif. March 31, 2023), the US Bankruptcy Court for the Central District of California concluded that there are two principal sources for a court’s power to authorize discovery in a Chapter 15 case. First, section 1521(a)(4) of the US Bankruptcy Code generally provides that a foreign representative may obtain discovery. Second, Bankruptcy Rule 2004 generally authorizes a court to order discovery upon the request of any party in interest, which may be a creditor. Discovery under Bankruptcy Rule 2004 must relate “to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge.” Courts have described the scope of discovery under Bankruptcy Ruler 2004 as broad and as authorizing a “fishing expedition.” Because Bankruptcy Rule 2004 applies to Chapter 15, according to the California court, it is thus available to any party in interest.
In this instance, the court’s ruling proved a pyrrhic victory for the creditor as the court limited a creditor’s ability to obtain discovery in a Chapter 15 case. In particular, the court observed that a party other than a foreign representative may be entitled to discovery in connection with its challenge to recognition of the foreign proceeding (e.g., discovery related to the definitional requirements of a foreign proceeding). In addition, a party may be entitled to discovery under Chapter 15 if (1) a foreign court requests a US court’s assistance in overseeing discovery in the US, or (2) discovery could facilitate the US court’s assistance of the foreign proceeding by, for example, disclosing a valuable claim that the foreign representative was “wrongfully refusing to pursue.” However, the court found that it would not be proper to allow a creditor to use Bankruptcy Rule 2004 as a “fishing expedition” in a Chapter 15 case. According to the court, that would defeat “the whole point of Chapter 15,” which “is to avoid a multiplicity of international proceedings and instead focus most litigation in the foreign main proceeding.” Moreover, the court would not permit the creditor to obtain discovery in the Chapter 15 case that related to pending litigation elsewhere. Thus, the court denied the creditor’s discovery request, which were broad and sought information to be used in litigation pending elsewhere.
In the Chapter 15 case of In re Ascentra Holdings, Inc., Case No. 21-11854, 2023 WL 8446208 (Bankr. S.D.N.Y. Dec. 5, 2023), the US Bankruptcy Court for the Southern District of New York similarly held that a party that asserted an interest in US assets was entitled to discovery in a Chapter 15 case. Following entry of an order recognizing a Cayman Islands liquidation that included a provision restraining the transfer of certain funds, a party claiming an interest in such funds requested that the New York bankruptcy court vacate its prior recognition order. In connection with that request, the party requested discovery from certain individuals who submitted declarations in support of the liquidators’ Chapter 15 petition. The liquidators opposed both requests.
Overruling the liquidators’ objections, the court noted that Bankruptcy Rule 1018 provides that certain discovery rules that would be applicable in an adversary proceeding and traditional litigation in US federal court apply to a contested Chapter 15 petition or a request to vacate a recognition order. Thus, in this instance, the party was entitled to discovery because it filed a request to vacate the recognition order. Moreover, because the liquidator opposed the vacatur request, it was a “contested matter,” which is not defined by the Bankruptcy Code or Bankruptcy Rules, but is generally understood to refer to a dispute before a bankruptcy court (other than an adversary proceeding). Under the Bankruptcy Rules, a party is entitled to certain discovery in connection with a contested matters. Thus, the court concluded that the party claiming an interest in the funds subject to the injunction could obtain discovery in connection with its request to vacate the recognition order.
As noted above, section 1521(a)(4) of the Bankruptcy Code generally provides that a foreign representative may obtain discovery. Section 1522 further provides that in granting relief under Section 1521, including discovery, a court must ensure that “the interests of the creditors and other interested including the debtor, are sufficiently protected.” 11 U.S.C. §1522. According to the US Bankruptcy Court for the Southern District of New York, “section 1522 is the basis for assessing and, where appropriate, imposing a protective or confidentiality order to accompany discovery authorized under section 1521.” In re Historic & Trophy Buildings Fund FCP-SIF, Case No. 22-11461, 2023 WL 5525044 (Bankr. S.D.N.Y. Aug. 25, 2023).
Following recognition of a Luxembourg liquidation proceeding under Chapter 15, a Luxembourg liquidator obtained an order authorizing discovery from several US affiliates of the debtor. The US affiliates consented to the discovery order, subject to an agreement with the liquidator on the form of a protective order that would preserve the confidentiality of commercially sensitive information. Unable to reach an agreement, the US affiliates filed a motion for a protective order that would (1) limit access to confidential information to the liquidator’s counsel, and (2) preclude the transmittal of confidential information to the liquidator, the Luxembourg court, or Luxembourg prosecutors. The bankruptcy court denied that request.
The court acknowledged that a target of discovery may obtain a protective order that protects confidential information from public disclosure. In this instance, after balancing the interests of the parties as required by section 1522, the court rejected the US affiliates’ request to limit access to the information produced to the liquidator’s counsel. According to the court, the liquidator has a “clear and substantial need for the information” requested. In particular, the liquidator intended to use the information to analyze and develop potential claims that could result in meaningful recoveries to the debtor’s creditors. In contrast, the US affiliates did not demonstrate that they faced “any significant risk” of public disclosure by not limiting access to the liquidator’s counsel. The parties understood that the liquidator could be obligated under Luxembourg law to share the fruits of the discovery with the Luxembourg court and/or prosecutors. In neither instance, however, would the documents necessarily be available to the general public. Indeed, the liquidator pledged to preserve the confidentiality of the information if used in Luxembourg. According to the bankruptcy court, the risk that the governmental authorities would disregard this pledge and disclose such information was not sufficient to support a protective order. Moreover, such a limitation on sharing the discovery with the Luxembourg court would contravene one of the purposes of Chapter 15, which is to facilitate cooperation between US courts and foreign courts. Consequently, the bankruptcy court held that it had authority to issue a protective order but would not limit sharing of discovery with the Luxembourg court or prosecutors.
In general, a discovery order is not a final order and thus not appealable unless the target of discovery is held in contempt for refusing to comply with the discovery order. However, the US Court of Appeals for the Second Circuit, which covers New York, Connecticut, and Vermont, previously concluded that a Chapter 15 discovery order is appealable. In re Barnet, 737 F.3d 238 (2d Cir. 2013). According to the Second Circuit, a discovery order in a Chapter 15 case is generally final because a discovery order is (often) the ultimate result of a Chapter 15 case and there is no expectation that the bankruptcy court will take any further action. Despite the Barnet decision, two United States District Courts in 2023 dismissed appeals from Chapter 15 discovery orders on the basis that they were not final orders.
In the first case involving Comair Limited, the US District Court for the Southern District of New York held that the bankruptcy court’s discovery order was not a final disposition of an issue from which the discovery target could appeal as of right. In re Comair Ltd., Case No. 21 Civ. 10146, 2023 WL 171892 (S.D.N.Y. Jan. 12, 2023). There, the South African foreign representative obtained a discovery order over the objection of an aircraft manufacturer. On appeal by the manufacturer, the district court concluded that the discovery order was not a final, appealable order. Foremost, the bankruptcy court noted that the discovery order “left open the question of the potential scope of discovery” and directed the parties to meet and confer to negotiate the terms of the discovery order. The order further provided that the parties should contact the bankruptcy court if they could not agree to the terms. Moreover, there were other pending issues in the Chapter 15 case, particularly those resulting from the conversion of the business rescue proceeding to a liquidation discussed above, that supported the conclusion that the discovery order did not resolve the Chapter 15 case. Thus, according to the district court, the bankruptcy court’s role was not over in the Chapter 15 case and its discovery order was not a final order subject to appeal. In addition, the court concluded that there were no “exceptional circumstances” that would warrant granting a request for leave to appeal the interim discovery order. Thus, the appeal was dismissed.
In the second case, the US District Court for the Southern District of Florida similarly held that a Chapter 15 discovery order is not a final order subject to appeal. See Hood v. Magno (In re SAM Industrias S.A.), 655 B.R. 245 (S.D. Fla. 2023). Following recognition of a Brazilian liquidation, the foreign representative obtained an order from a bankruptcy court compelling production of documents from one of the Brazilian debtors’ former counsel, who appealed the bankruptcy court’s decision. On appeal, the district court noted the US Court of Appeals for the Eleventh Circuit, which includes Florida, Georgia, and Alabama, previously refused to adopt the Barnet rationale and held that Chapter 15 discovery orders are not always final. In this instance, the district court concluded that discovery was not necessarily the ultimate goal of the Chapter 15 case. According to the foreign representative, “the purpose of the Chapter 15 proceedings is to locate and attempt to seize any assets that the Debtor has hidden in the United States and elsewhere.” Discovery was likely only a step towards accomplishing that purpose. Because there was at least a potential for future action by the bankruptcy court in the Chapter 15 case, the district court held that the discovery order was not final and thus not subject to appeal. Moreover, like the court in Comair, the Florida district court denied the appellant’s request for leave to appeal the interim discovery order, and thus dismissed the appeal.
A debtor with cross-border operations or assets in multiple jurisdictions will often find itself needing relief from multiple courts. In the US, Chapter 15 provides a flexible tool to assist with the administration of a foreign liquidation or debt restructuring. Relief under Chapter 15, however, is not limited to relief that is coextensive to what is available in the foreign forum. Instead, Chapter 15 provides foreign debtors and their representatives with benefits that may not be available outside the US. For example, foreign debtors and their representative can utilize Chapter 15 to obtain discovery or pursue claims that may not be available elsewhere. However, a US court can only grant such relief if it is satisfied that the interests of all interested entities are sufficiently protected and that the relief does not violate US public policy. Assuming those thresholds are met, a US court may grant relief beyond what may be available in the debtor’s home court.
1 For a more detailed discussion of the Ace Track decision, see,
US Bankruptcy Court dismisses Ch. 15 case, bars foreign representative from appearing before it
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Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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