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Development finance facilities: Prospects for APAC
Sponsors and project developers across the renewables and energy transition space are currently facing a challenging macroeconomic environment.
Chapter 15 of the United States Bankruptcy Code incorporates the Model Law on Cross-Border Insolvency. As of the date of this article, 56 jurisdictions, including the US, Australia, Brazil, Canada, Japan, Mexico, Singapore, South Africa, and the United Kingdom, have adopted a version of the Model Law, which generally provides a procedure for a country to recognize a foreign insolvency, liquidation, bankruptcy, or debt-restructuring elsewhere.
In 2022, US courts were presented with Chapter 15 petitions to recognize foreign proceedings pending in the Bahamas, Bermuda, Brazil, the British Virgin Islands, Bulgaria, Canada, Cayman Islands, Estonia, Hong Kong, Jersey, Indonesia, Isle of Man, Italy, Luxembourg, Mexico, the People's Republic of China, and the UK. Moreover, there were several written decisions issued in Chapter 15 cases last year. This article describes a handful of those decisions. Part I discusses an appellate court decision emphasizing the objective nature of recognition. Part II highlights a possible upcoming appellate court level split as to the imposition of the traditional US debtor-eligibility requirements to Chapter 15 cases. Part III describes two decisions that serve as reminders that a proceeding pending elsewhere must be a foreign proceeding and a foreign main or a foreign nonmain proceeding as defined in the Bankruptcy Code for it to be recognized in the US under Chapter 15. Part IV examines a decision in which a court reinforced a debtor's ability to restructure US governed debt outside the US. Finally, Part V summarizes a decision in which a court authorized service of a subpoena by email and social media.
Section 1517 of the Bankruptcy Code generally provides that a foreign proceeding shall be recognized if three conditions are met. First, the foreign proceeding must be a "foreign main proceeding" or "foreign nonmain proceeding" as defined by the Bankruptcy Code. Second, the foreign representative must be a person or body. Finally, certain procedural requirements must be satisfied. In addition, some US courts have concluded that a foreign debtor must also satisfy the debtor-eligibility requirement applicable to a plenary proceeding under the Bankruptcy Code for a foreign proceeding to be recognized. However, as long as those objective requirements are met, a foreign proceeding must be recognized under Chapter 15 unless to do so would be manifestly contrary to US public policy.
In In re Black Gold S.A.R.L., 635 B.R. 517 (9th Cir. B.A.P. 2022), a US appellate panel reversed a US bankruptcy court's decision denying recognition to a foreign proceeding on the basis that it was purportedly filed in bad faith. Black Gold S.A.R.L. was a Monaco company that distributed oil and related products manufactured and sold by, among others, International Petroleum Products and Additives Company ("IPAC"). According to IPAC, Black Gold and its insiders improperly used sensitive and confidential information to establish a competitor to IPAC. An arbitrator agreed and issued an award in favor of IPAC. Following IPAC's efforts to collect a judgment confirming the arbitration award, Black Gold filed an insolvency proceeding in Monaco ("Monegasque Proceeding"). Thereafter, Black Gold's foreign representative filed a petition for recognition of the Monegasque Proceeding with the US Bankruptcy Court for the Northern District of California.
IPAC opposed recognition of the Monegasque Proceeding under Chapter 15, arguing that recognition would be manifestly contrary to US public policy for two reasons. First, IPAC contended that Black Gold's insiders filed the insolvency proceeding and the Chapter 15 case in bad faith to evade liability for stealing intellectual property. Second, IPAC asserted that Monegasque law "dramatically restricted the rights and remedies a creditor enjoys under U.S. law." The bankruptcy court concluded that the Chapter 15 case "was not a legitimate use of chapter 15 for the purposes and objectives as intended under § 1501." Thus, the bankruptcy court denied the Chapter 15 petition without even addressing the recognition requirements under section 1517.
On appeal, the appellate court acknowledged that section 1501 of the Bankruptcy Code identifies the broad scope and purpose of Chapter 15, but does not create substantive rights or govern recognition of a foreign proceeding. As the court noted, a foreign proceeding must be recognized as long as the section 1517 requirements are met.
With respect to section 1517, the court first concluded that the Monegasque Proceeding was a foreign proceeding as defined in the Bankruptcy Code. "The evidence established that the Monegasque proceeding is a collective judicial proceeding in Monaco, conducted pursuant to Monegasque insolvency law, in which the [debtor's assets] are subject to the foreign representative's control under the supervision of the Monegasque court for the purpose of reorganization or liquidation." Next, the appellate court found that all of the requirements of 1517 were satisfied. First, it was undisputed that the Monegasque Proceeding was a foreign main proceeding. Second, the foreign representative was a person appointed as a trustee and authorized to administer the reorganization or liquidation of the debtor's assets or affairs. Finally, there was no dispute that the procedural requirements were satisfied. Thus, the court concluded that the Monegasque Proceeding must be recognized under Chapter 15 unless recognition would be manifestly contrary to US public policy.
Section 1506 of the Bankruptcy Code allows a court to refuse to grant relief under Chapter 15 if it "would be manifestly contrary to the public policy of the United States." US courts have rarely invoked this public policy exception, finding that it "should be invoked only under exceptional circumstances concerning matters of fundamental importance." According to the court, the differences between Monegasque and US procedural and substantive law were "tolerable," and as such did not implicate the public policy exception.
Citing to several decisions in support, the appellate court further held that misconduct or bad faith by the debtor or an insider was not a basis to deny relief under Chapter 15. Moreover, in this instance, the alleged improper conduct did not violate US public policy. As the court noted, the Chapter 15 case and the Monegasque Proceeding, like many other bankruptcy cases, was filed to "thwart collection efforts." That was not unique. Indeed, US bankruptcy petitions are often filed for a similar reason.
Because the foreign representative had satisfied the section 1517 requirements, the appellate court concluded that the Monegasque Proceeding must be recognized. Misconduct and bad faith alone are not sufficient to deny recognition under the public policy exception. The appellate court, however, emphasized that the bankruptcy court could otherwise address the misconduct if necessary and appropriate. For example, the court could lift the stay resulting from recognition of the Monegasque Proceeding as a foreign main proceeding and allow litigation to proceed against the debtor in the US.
According to the US Court of Appeals for the Second Circuit (which includes New York), a foreign debtor must satisfy the general debtor-eligibility requirements set forth in the Bankruptcy Code for its foreign proceeding to be recognized. See Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238, 247 (2d Cir. 2013). Under section 109(a) of the Bankruptcy Code, "only a person that resides or has a domicile, a place of business, or property in the United States…may be a debtor." 11 U.S.C. § 109(a). Therefore, New York bankruptcy courts will recognize a foreign proceeding only if the debtor has a residence, domicile, place of business, or an asset in the US.
As noted in last year's "Year in Review," a district court in Florida, which is a common forum for Chapter 15 cases, disagreed with the Second Circuit and concluded that section 109(a) does not apply in Chapter 15 cases. See In re Al Zawawi, 637 B.R. 663 (M.D. Fla. 2022). That decision was appealed to the US Court of Appeals for the Eleventh Circuit. As of the date of this publication, the Eleventh Circuit has not issued its ruling. However, if the Eleventh Circuit affirms, there would be a split as to the applicability of section 109(a) to Chapter 15 cases that may need to be resolved by the US Supreme Court or further legislation.
Chapter 15 applies where "assistance is sought in the United States by a foreign court or a foreign representative in connection with a foreign proceeding." 11 U.S.C. § 1501(b). 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 by a foreign court, for the purpose of reorganization or liquidation."
In In re Global Cord Blood Corp., No. 22-11347, 2022 WL 17478530 (Bankr. S.D.N.Y. Dec. 5, 2022), the bankruptcy court for the Southern District of New York denied a petition to recognize a Cayman Islands proceeding brought under section 92(e) of the Cayman Islands Companies Act (the "Section 92(e) Proceeding"), finding that the proceeding was not a "collective proceeding brought for the purpose of reorganization or liquidation."
Section 92(e) of the Companies Act permits a court to order the winding up of a company when it would be "just and equitable" regardless of the financial condition of the debtor. Here, the Grand Court of the Cayman Islands issued an order under section 92(e) directing the appointment of Joint Provisional Liquidators ("JPLs") to preserve the value of Global Cord's assets and to investigate and report on Global Cord's corporate affairs. The Grand Court's order further authorized the JPLs to commence winding-up or insolvency proceedings. The JPLs, however, concluded that Global Cord was solvent and, therefore, did not commence such a proceeding. Instead, the JPLs filed a Chapter 15 petition for recognition of the Section 92(e) Proceeding.
An interested party objected to recognition, arguing that the Section 92(e) Proceeding was not a foreign proceeding because it was not (1) under a law relating to insolvency or adjustment of debt, (2) a "collective" proceeding, and (3) for the purpose of reorganization or liquidation. The US court found that section 92(e) was contained in the Companies Act, which like other offshore companies acts, is a comprehensive statute that also addresses, among other things, a company's insolvency and winding-up. Thus, according to the court, the proceeding was generally under a law relating to insolvency of adjustment of debt. However, the liquidator failed to satisfy two other elements of a foreign proceeding.
First, the Bankruptcy Court found that the Section 92(e) Proceeding was not a collective proceeding. In general, a proceeding is collective if it inures to the benefit of all creditors and concerns all interests of the creditor body as a whole. In this instance, creditors were not given notice of the proceeding. Moreover, the particular proceeding was not a forum for the JPLs to identify creditors, to quantify and classify Global Cord's debts, or to make distributions to creditors. Given the limited creditor participation and the lack of notice to creditors, the Bankruptcy Court found that the Section 92(e) Proceeding was not a collective proceeding.
Second, the Section 92(e) Proceeding was not for the purpose of reorganization or liquidation. Instead, the proceeding was brought to investigate alleged misconduct by the debtor and its insiders. It bore little, if any, connection to Global Cord's financial condition and was not intended to address the debtor's assets or liabilities. Thus, the Bankruptcy Court concluded that the proceeding could not be recognized under Chapter 15. The court, however, noted that it may grant recognition to the Section 92(e) Proceeding at a later date should the JPLs engage a process to liquidate or restructure Global Cord.
A foreign proceeding may be recognized if it is a foreign main proceeding or a foreign nonmain proceeding. If the foreign proceeding is neither, it cannot be recognized. A foreign main proceeding is a proceeding pending in the debtor's center of main interest or "COMI" which is not defined in the Bankruptcy Code. However, a debtor's COMI is presumed to be the location of its registered office absent evidence to the contrary. A foreign nonmain proceeding is a proceeding pending where a debtor has an "establishment," which means "any place of operations where the debtor carries out nontransitory economic activity." In 2022, the US Bankruptcy Court for the Western District of Oklahoma denied a Chapter 15 petition for recognition of an Isle of Man liquidation, finding that the proceeding was not a foreign main proceeding or a foreign nonmain proceeding. In re Paul Shimmin, as Liquidator of Comfort Jet Aviation, Ltd., Case No. 22-10039 (Bankr. W.D. Okla. Oct. 14, 2022).
In this instance, the Isle of Man was presumed to be Comfort Jet's COMI. However, the evidence demonstrated that Comfort Jet's COMI was elsewhere. In particular, Comfort Jet's registered address on the Isle of Man was merely a "letter box." Moreover, the liquidator failed to produce any evidence regarding Comfort Jet's operations there. Instead, the evidence produced—including the location of the debtor's assets, creditors, and managers—reflected that the debtor's COMI was somewhere other than the Isle of Man. Finding that this evidence was insufficient to conclude that Comfort Jet's COMI was the Isle of Man, the court denied recognition of the liquidation as a foreign main proceeding.
The court further found that the liquidation could not be recognized as a foreign nonmain proceeding because Comfort Jet did not have an establishment in the Isle of Man. According to the court, the foreign representative must demonstrate "a local effect on the marketplace, more than mere incorporation and record-keeping and more than just the maintenance of property" to satisfy the establishment requirement. Comfort Jet's liquidator, however, failed to satisfy that burden.
The UK and certain other jurisdictions have adopted the "Rule in Gibbs," which traces its origin to a decision by the English Court of Appeal in Anthony Gibbs & Sons v. LaSociete Industrielle et Commeciale de Mataux, (1890) 25 QBD 399, where the court refused to recognize a French discharge of debt governed by English law. Under the Rule in Gibbs, debt generally can only be discharged or modified under the applicable governing law. Thus, for example, English law governed debt can generally only be discharged under English law. However, there is an exception. Under the Rule in Gibbs, debt can be discharged or modified under the law of a jurisdiction other than the situs of the governing law if the creditor owed the debt submits to the jurisdiction of that foreign court.
In 2022, a court in Hong Kong, which applies the Rule in Gibbs, concluded that US law-governed debt may only be discharged or restructured under US law. Re Rare Earth Magnesium Technology Group Holdings Ltd [2022] HKCFI 1686. Thus, according to the Hong Kong court, an offshore proceeding, even if recognized by a US court under Chapter 15, would not necessarily be effective to discharge or restructure US law governed debt. Subsequently, the US Bankruptcy Court for the Southern District of New York clarified the possibility of discharging or restructuring US law governed debt under foreign law. In re Modern Land (China) Co. Ltd, 641 B.R. 768 (Bankr. S.D.N.Y. 2022).
Modern Land (China) Co. Ltd. is a Cayman Islands company with NY law governed bond debt. It is a holding company with subsidiaries incorporated in the Cayman Islands and the British Virgin Islands. Most of the group's business is conducted in the People's Republic of China. Facing liquidity pressures, Modern Land proposed a scheme of arrangement in the Cayman Islands to restructure the NY law governed bonds. In addition, Modern Land filed a petition for recognition of the Cayman Islands proceeding and an order enforcing the scheme in the US under Chapter 15.
In its opinion, the bankruptcy court squarely addressed the Hong Kong court's comments regarding US law, noting the importance of the ability to modify or discharge NY law governed debt in a foreign proceeding. The bankruptcy court noted, with great respect to the Hong Kong court, that it had misinterpreted US law. According to the US bankruptcy court, Chapter 15 may limit a US court's authority to enjoin actions against a debtor and its assets to the territorial jurisdiction of the US, but it does not limit a foreign court's ability to discharge US law governed debt. "Provided that the foreign court properly exercises jurisdiction over the foreign debtor in an insolvency proceeding, and the foreign court's procedures comport with broadly accepted due process principles, a decision of the foreign court approving a scheme or plan that modifies or discharges New York law governed debt is enforceable." Thus, the Modern Land decision reinforced the longstanding and "unremarkable proposition" that a US court can recognize and enforce a foreign restructuring of US law governed debt.
Ultimately, the bankruptcy court granted recognition to the Cayman Islands proceeding as a foreign main proceeding. According to the court, the evidence, including the creditors' expectations and the judicial role and the insolvency activities in the Cayman Islands, supported a finding that the debtor's COMI was the Cayman Islands. Further, the court recognized and enforced the scheme that restructured the NY law governed bonds, in the US.
A foreign representative often needs information to identify, locate, and recover a debtor's assets for the benefit of the debtor's creditors and other stakeholders. Under Chapter 15, a court may authorize a foreign representative to seek discovery from any person "concerning the debtor's assets, affairs, right, obligations or liabilities." See 11 U.S.C. §1512(a)(4). However, a foreign representative must nevertheless comply with certain procedural requirements. In particular, rule 45 of the Federal Rules of Civil Procedure, made applicable in bankruptcy cases (including Chapter 15) by Federal Rule of Bankruptcy Procedure 9017, generally requires personal service of a discovery subpoena. In 2022, the US Bankruptcy Court for the Southern District of New York authorized service of a subpoena on a US citizen by email and social media. See In re Three Arrows Cap., Ltd., 647 B.R. 440 (Bankr. S.D.N.Y. 2022).
Three Arrows is a BVI investment firm that was engaged in trading cryptocurrency and other digital assets. In June 2022, Three Arrows went into liquidation in the BVI. Thereafter, the official liquidators obtained recognition of the BVI liquidation in the US under Chapter 15. In addition, the liquidators obtained authority from the bankruptcy court to seek discovery and to issue subpoenas in the US.
Despite their efforts, the liquidators were purportedly unable to obtain information from the debtor's founders, who had key information regarding the debtor's affairs and assets. Moreover, the liquidators did not know where the founders were actually located. Accordingly, the liquidators asked the court to authorize service of subpoenas outside the US by email and social media.
The bankruptcy court divided its analysis between service on US nationals or residents and non-US nationals or residents. The bankruptcy court noted that Rule 45 authorizes service of a subpoena on a US national or resident in a foreign country. The bankruptcy court, however, found that Rule 45 does not authorize service of a subpoena outside the US on a non-US national or resident. Thus, the bankruptcy court did not allow the liquidators to serve a subpoena outside the US on the founder that was not a US national or resident.
The foreign representative demonstrated that one of the debtor's founders was a US national. Under Rule 45, a US national or resident may be served with a subpoena in a foreign country in accordance with 28 U.S.C. § 1783, which generally authorizes the issuance of a discovery subpoena if discovery (1) is necessary in the interest of justice, and (2) not possible to be obtained in any other manner. Here, the bankruptcy court found that both elements were satisfied. First, the discovery was necessary. In particular, the bankruptcy court concluded that the founders, who were "paramount" to the debtor's organization, "might arguably be the only parties with knowledge regarding the nature, extent, and access to the Debtor's assets, particularly as they are connected to the United States in this Chapter 15 case." Second, there were no other practical methods to obtain the discovery. Indeed, the founders were likely the only persons with the information requested and they had not cooperated with the liquidators' discovery requests. Hence, the court authorized the liquidators to serve a subpoena outside the US on the US national founder.
The court noted that Rule 45 typically requires personal service of a subpoena. However, citing to existing precedent, the bankruptcy court concluded that it could authorize alternative service of the subpoena that was "reasonably calculated" to provide actual notice to a discovery target. In this instance, the court was "convinced that alternative service via email and Twitter would be warranted and reasonably calculated to provide notice." According to the court, the founder had provided the email address to the liquidators. Moreover, the liquidator had demonstrated that the founder had used the email and Twitter accounts. Thus, the court allowed the liquidators to serve a subpoena on the US national by email and social media. It remains to be seen whether the founder will comply with the subpoena and what relief the liquidators may obtain should the founder ignore the subpoena.
Congress enacted Chapter 15, in part, to foster cooperation between US courts and foreign courts. However, a court will typically not grant relief under Chapter 15 solely because it would be consistent with Chapter 15's goals. Instead, a court must be satisfied that a foreign representative has satisfied its statutory requirements before granting relief. A US court will typically not grant relief solely because it would be equitable or consistent with Chapter 15's objectives.
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