Best of Both Worlds: Utilizing Chapter 15 to Achieve a Successful Sale Process
Chapter 15 of the Bankruptcy Code governs cross-border insolvency cases and provides an effective mechanism for a liquidating sale process for foreign companies with assets located within the United States. It authorizes a debtor's appointed foreign representative to sell assets within the jurisdiction of the United States free and clear of liens and encumbrances pursuant to Section 363 of the Bankruptcy Code.
Asset sales under Section 363 generally are more economical and rapid than acquiring assets through a Chapter 11 reorganization plan or the sale procedures available under foreign insolvency regimes. Thus, foreign debtors seeking an efficient liquidation or asset sale increasingly are turning to Chapter 15 as a cost-effective strategy in cross-border distressed situations.
Chapter 15 was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to "provide effective mechanisms for dealing with cases of cross-border insolvency." The purpose of Chapter 15 is to encourage cooperation between the United States and foreign nations with respect to transnational insolvency cases. It is structured to accomplish the twin goals of promoting the efficient administration of the bankruptcy estate and ensuring fairness for both local and foreign creditors.
A chapter 15 case is commenced by a debtor's "foreign representative" filing a petition in the U.S. Bankruptcy Court for recognition of a pending "foreign proceeding." The Bankruptcy Code at 11 U.S.C. § 101(23) defines a "foreign proceeding" as "a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency ... in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court. Assuming it meets certain statutory prerequisites, the foreign proceed[ing]" is then recognized by the U.S. Bankruptcy Court as either a "foreign main proceeding" or a "foreign nonmain proceeding."
Upon recognition as a foreign main proceeding, the foreign representative is empowered to operate the debtor's business much to the same extent as a debtor in possession in a Chapter 11 case. Once recognition as a foreign main proceeding is granted, the foreign representative is automatically vested with authority under Section 363 of the Bankruptcy Code to use, sell or lease property of the estate. Although recognition of a foreign proceeding as nonmain does not automatically entitle the foreign representative to utilize Section 363, Chapter 15 empowers the bankruptcy court to grant additional discretionary relief in a nonmain proceeding to "protect the assets of the debtor or the interests of the creditors," which conceivably could include authorization of a Section 363 sale, according to 11 U.S.C. § 1521.
FOREIGN MAIN OR NONMAIN PROCEEDING?
As Chapter 15 provides a two-tiered structure for recognition as either a "foreign main proceeding" or "foreign nonmain proceeding" and provides specific relief depending upon the classification of the case, it is critical to determine whether a foreign proceeding will qualify as main or nonmain from the outset. Foreign main proceedings are statutorily classified as those cases pending in the foreign country where the debtor has its "center of main interests," according to 11 U.S.C. § 1502(4). The Bankruptcy Code at 11 U.S.C. § 1516(c) does not define the phrase "center of main interests" (COMI), but it does establish a rebuttable presumption that it is the country where the debtor's registered office is located.
In contrast, foreign nonmain cases are ancillary proceedings in the country where the debtor merely has an "establishment," defined by the Bankruptcy Code as "any place of operations where the debtor carries out a non-transitory economic activity" according to 11 U.S.C. § 1502(2).
As Chapter 15 is largely in its infancy, the guidelines for determining whether foreign cases should be recognized as main or nonmain proceedings are still being charted by courts. In a recent decision from the Delaware Bankruptcy Court, In re ABC Learning Centres Ltd., Judge Kevin Gross outlined the relevant factors in examining whether a foreign proceeding qualifies as a main proceeding.
The debtors in ABC Learning commenced voluntary liquidation proceedings in Australia in 2008 pursuant to Australia's statutory scheme for receivership and liquidation. In May 2010, the debtors filed petitions in Delaware bankruptcy court seeking recognition of their Australian insolvency proceedings as foreign main proceedings.
Gross initially addressed whether the Australian liquidating proceedings meet the criteria for a "foreign proceeding" under Chapter 15. The bankruptcy court held that the Australian proceedings satisfied this definition because they were administered under a statutory framework for collecting and distributing the debtors' assets according to the relevant priority scheme under the supervisions of the Australian court for the purpose of achieving an orderly wind-up of the debtors' operations.
Next, Gross examined whether the Australian liquidation proceedings qualified as a foreign main proceeding. In evaluating whether Australia qualified as the debtors' COMI, the bankruptcy court applied the following seven-factor test: the location of the debtor's headquarters; the location of those actually managing the debtor; the location of the debtor's primary assets; the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected by the case; and/or the jurisdiction whose law would apply to most disputes.
Citing to the undisputed evidence presented by the debtors, Gross concluded that Australia constituted the debtors' COMI because the debtors were incorporated and registered in Australia and listed on the Australian stock exchange; the debtors' directors and appointed receiver resided in Australia; the books and records of the debtors were located in Australia; the vast majority of the debtors' assets and creditors were in Australia; and the debtors' concurrent receivership and liquidation proceedings were governed by Australian law.
AUCTION PROCESS CONDUCTED
Decisions such as ABC Learning provide guidance as to when foreign insolvency cases will qualify as main proceedings, which is critical in having the needed flexibility to run a successful auction process.
First, recognition as a foreign main proceeding automatically entitles the foreign representative to utilize the powers granted by Section 363 to liquidate the debtor's assets. Second, foreign main proceedings generally are viewed by bankruptcy courts to be more supplementary in nature. Therefore, bankruptcy courts often will defer to the practices and the procedures of the jurisdiction of the foreign main case to a greater extent, which allows the foreign debtor to incorporate those favorable aspects of the foreign insolvency regime into the Chapter 15 process as well.
Recently, the Delaware Bankruptcy Court in the Chapter 15 case of In re WellPoint Systems Inc., recognized the Canadian insolvency proceedings of one Canadian corporation and three Delaware corporations as foreign main proceedings to facilitate a successful going concern liquidation auction.
In WellPoint Systems, the debtors commenced a receivership in Canada under the Bankruptcy and Insolvency Act for the purpose of liquidating the debtors' business. The Delaware Bankruptcy Court approved an auction process established in the Canadian insolvency proceeding which provided for a stalking horse bidder and the typical associated bid protections, such as an expense reimbursement and a break-up fee.
In addition, the U.S. Bankruptcy Court allowed the debtors to employ a flexible auction process which provided for tiered bid deadlines and broad discretion for the debtors' in valuing submitted bids. This created an opportunity for a robust bidding process in the Canadian receivership proceeding which resulted in a third-party bidder topping the stalking horse bid and infusing the debtors' bankruptcy estate with significant additional funds for distribution.
The U.S. sale approval order granted the purchaser the protections of a good faith purchaser under Section 363(m) of the Bankruptcy Code as well as authorizing the assumption and assignment of certain contracts (and granting the debtors the associated protections) pursuant to Section 365. By properly utilizing the powers provided by Chapter 15, the debtors were able to coordinate the sale of their assets located in the United States and elsewhere through a single global sale process within 11 weeks of commencement of the insolvency proceedings.
In WellPoint Systems, the fact that the Canadian receivership proceedings were recognized as foreign main proceedings allowed the debtors the needed flexibility to incorporate the beneficial elements from both the Canadian and United States insolvency regimes to conduct a streamlined asset sale. In particular, the U.S. Bankruptcy Court's blessing of the bidding and sale procedures previously approved by the Canadian court allowed for an expedited sale timeline that made the Chapter 15 filing attractive to both the debtors' secured lenders and potential purchasers. Furthermore, the significant protections granted to the eventual purchaser of the assets under Section 363 and Section 365 of the Bankruptcy Code due to the imprimatur of the sale process by the Delaware Bankruptcy Court made the debtors' assets more marketable as a going concern.
Distressed companies with operations or entities located in the United States can maximize the enterprise value of the assets by conducting sales approved on dual tracks by courts in the United States and the debtor's foreign country. By obtaining recognition, foreign debtors can conduct an expeditious liquidation or sale of a debtor's assets that would otherwise be unavailable if the debtor filed only a single case in either its foreign country or the United States.
Reprinted with permission from 6/22/2011 issue of the Delaware Business Court Insider© 2011 ALM Media Properties LLC. Further duplication without permission is prohibited. All rights reserved.