Restructuring

Contributed by Maurice Horwitz
Chapter 15 of the Bankruptcy Code was introduced more than ten years ago to “to provide effective mechanisms for dealing with cases of cross-border insolvency.”  It incorporates the Model Law on Cross-Border Insolvency (the “Model Law”) promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”).  The Model Law was UNCITRAL’s attempt to create a template for all member nations to ratify their own “chapter 15” statutes, and thus assist in the administration of cross-border cases among member nations.  (A list of the member nations that have codified a version of the Model Law can be found here.)
The primary purpose of chapter 15 is for a debtor in a foreign proceeding to commence an ancillary proceeding in a United States bankruptcy court for the purpose of assisting in the administration of the debtor’s foreign proceeding.  Most of the chapter’s provisions are devoted to this purpose; thus, most practitioners assume it is its only purpose.  Not so.  Several provisions of chapter 15 are applicable in “plenary” (as opposed to “ancillary”) cases, such as those under chapter 7 and 11, where some international component is present.  This makes sense in light of chapter 15’s origins in the Model Law, the purpose of which is to authorize and encourage cooperation and coordination between jurisdictions.
A good example of this section 1505 of the Bankruptcy Code.  Section 1505 allows a debtor in possession (or a chapter 7 or 11 trustee, or an examiner) to obtain court approval to submit a petition to a foreign court that (i) requests recognition of the debtor’s U.S. bankruptcy case, and (ii) recognizes the debtor (or trustee, or examiner) as the “foreign representative” of the debtor’s estate.  Section 1505 of the Bankruptcy Code provides:

A trustee or another entity (including an examiner) may be authorized by the court to act in a foreign country on behalf of an estate created under section 541.  An entity authorized to act under this section may act in any way permitted by the applicable foreign law.

11 U.S.C. § 1505.  Section 1505 only applies to cases filed under chapters other than chapter 15 of the Bankruptcy Code.  (This is clear from the statutory language “on behalf of an estate created under section 541”; a chapter 15 case does not create an estate under section 541.)
One could interpret section 1505 as providing the debtor with authority to conduct business in a foreign country.  But a chapter 11 debtor does not need court authority to conduct business in the ordinary course – at home or abroad – and a chapter 7 trustee would seek this authority under section 721.  Rather, the authority sought by a debtor under section 1505 is specific to seeking a foreign court’s recognition of the debtor’s U.S. bankruptcy case.  It allows a debtor to petition a foreign court for recognition of its U.S. bankruptcy case under the foreign jurisdiction’s version of the Model Law, or other similar law.
Although the language of 1505 appears permissive, the legislative history states that “this section requires all trustees and debtors to obtain court approval before acting abroad.”  Why?  “[T]o ensure that the court has knowledge and control of possibly expensive activities.”  Interestingly, the Bankruptcy Code’s requirement is a change from the language of the Model Law, which automatically authorizes an administrator to act abroad.  Article 5 of the Model Law (the provision on which section 1505 is based) provides that the person or body administering a reorganization or liquidation in a country that has enacted the Model Law (an “Enacting State”) “is authorized to act in a foreign State on behalf of a proceeding under…the laws of the enacting State relating to insolvency.”  The Bankruptcy Code is more restrictive – an order under 1505 is required before commencing an ancillary bankruptcy proceeding abroad.
Even if it were not required by U.S. law, section 1505 enables a debtor to obtain from the bankruptcy court one of the key pieces of paper required in most foreign jurisdictions when petitioning for recognition of a U.S. bankruptcy case. The requirements to complete a petition for recognition are substantially similar in countries that have adopted the Model Law.  Article 15 of the Model Law provides that a petition shall be accompanied by

1. A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or
2. A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or
3. In the absence of evidence referred to in subparagraphs (a) and (b), any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative.That is section 1505 in a nutshell: little known, not terribly dazzling, but indispensable nonetheless – at least to U.S. debtors seeking recognition abroad. And that is what Breaking the Code is all about, isn’t it?

Model Law, Art. 15.2. In most non-U.S. jurisdictions, the commencement of an insolvency proceeding still requires a court order. Chapter 11 is different – there is no order commencing the case and anointing the debtor as a “debtor in possession.” Instead, a chapter 11 case commences immediately upon the filing of a petition. Chapter 11 debtors, therefore, do not have the type of evidence specified in Article 15.2(a) of the Model Law – unless they ask for it under section 1505.
That is section 1505 in a nutshell:  little known, not terribly dazzling, but indispensable nonetheless – at least to U.S. debtors seeking recognition abroad.  And that is what Breaking the Code is all about, isn’t it?