The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Bankruptcy Act), also known as the Bankruptcy Reform Act created a new bankruptcy Chapter 15, entitled "Ancillary and Other Cross-Border Cases." Designed to replace Section 304 (which is repealed) of the Bankruptcy Code, Chapter 15 incorporates into United States bankruptcy law the Model Law on Cross-Border Insolvency developed by the United Nations Commission on International Trade Law.
Chapter 15 serves as a statutory framework designed to facilitate international cooperation in cases of transnational insolvency that involve a foreign debtor. For purposes of this Chapter, a foreign debtor is generally defined as an entity (other than an individual) that is the subject of an insolvency or bankruptcy proceeding in a country other than the United States having tangible property or business operations located within the territorial jurisdiction of the U.S. courts. Consequently, a foreign debtor is most likely to be a large multinational business. Specifically excluded from filing under Chapter 15, however, are foreign banks that have a branch or agency in the United States?
When Is Chapter 15 Applicable?
Chapter 15 is applicable when:
- A foreign court or a representative of a party involved in a foreign proceeding seeks assistance in the United States in connection with that proceeding
- A party to a case pending under U.S. bankruptcy law seeks assistance in a foreign country with respect to that case
- A foreign debtor is involved concurrently in both a foreign proceeding and a case pending under U.S. bankruptcy law
- Concerned parties (creditors or otherwise) in a foreign country wish to request the commencement of, or their participation in, a proceeding against a foreign debtor under U.S. bankruptcy law
Commencement of an Ancillary Case under Chapter 15
To seek U.S. court recognition of a foreign proceeding (and any relief available as a result of such recognition), a foreign representative must file a petition. The petition must be accompanied by evidence of the existence of the foreign proceeding and of the representative's appointment. At the foreign representative's request, if relief is urgently needed to protect the debtor's assets or the creditors' interests, the court may grant provisional relief before ruling on the petition for recognition.
Once a hearing on the petition is held, the U.S. court recognizes the foreign proceeding. Under Section 304, the courts were permitted the authority to grant such recognition only after assurance there would be no potential prejudice to U.S. creditors or preferential distribution of the debtor's property. Such is not the case under Chapter 15; recognition of a legitimate petition accompanied by the required evidence mentioned above is virtually automatic. The court can refuse to recognize a petition only if doing so would be contrary to U.S. public policy or in conflict with a treaty to which the United States is a party.
Foreign proceedings are recognized as "foreign main proceedings" if they involve a proceeding in a foreign country where the foreign debtor has its main place of business. If the foreign proceeding involves a foreign country where the foreign debtor carries out non-transitory economic activity but does not have its main place of business, the proceeding is classified as a "foreign non-main proceeding." Once the petition has been granted recognition, the foreign representative can sue or be sued in U.S. courts, and may apply for appropriate relief. In foreign main proceedings, this relief shall automatically include a stay on actions against the debtor's U. S. assets, provisions to provide for the adequate protection of the interests of secured creditors, and limits on the use, sale, or lease of the debtor's property located within the territorial jurisdiction of the U. S. courts.
Relief That May Be Granted
Once the U.S. court recognizes a foreign proceeding (main or nonmain), it may (at the request of the foreign representative) grant appropriate relief, including:
- Staying the initiation or continuation of an action, including an execution, against the debtor's assets located within the territorial jurisdiction of the U.S. courts.
- Suspending the right to transfer, encumber by lien, or dispose of the debtor's assets.
- Providing for examining witnesses or taking evidence concerning the debtor's assets or business affairs.
- Entrusting all or part of the debtor's assets located within the territorial jurisdiction of the U. S. courts to the foreign representative. The foreign representative may distribute these assets only if the U. S. court is satisfied that the interests of U.S. creditors will be protected.
- Additional relief as deemed necessary by the U.S. court to reasonably assure just treatment to those holding claims against the debtor, protection of those claimholders against prejudice or inconvenience in processing their claims, and prevention of preferential or fraudulent transfers of the debtor's assets.
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