Blank Rome LLP  By Jeremy J.O. Harwood

Chapter 15 of the Bankruptcy Code, the U.S. enacted equivalent of the UNCITRAL Model Law On Cross-Border Insolvencies, has received a fair amount of use by distressed shipping companies since it was enacted in 2005. In 2007, we wrote in these pages that Chapter 15 might provide a welcome U.S. safe harbor. (See “Shipping, Finance, and Insolvencies: A Homeport in the United States?” Mainbrace, June 2007, No. 2). More recently, in 2009, we published “Shipping, Finance, and Insolvencies: The Black Swan Comes Home to Roost” (Mainbrace, January 2009, No. 1) about the increasing likelihood of shipping companies seeking U.S. bankruptcy protection. In the last three years, numerous shipping and other companies have done just that—not only to protect assets in the United States, but also for other purposes. The number of such filings might almost be called something of a “cottage industry”—were it not for the “industrial” rates charged. Obtaining recognition for a foreign insolvency is not, however, a foregone conclusion. The “center of main interest” or “COMI” should be carefully examined before pursuing the Chapter 15 path.

The Mechanics of Recognition

THE ISSUE OF COMI

Under Chapter 15, a foreign representative may file a petition seeking recognition of a foreign insolvency proceeding as either a “foreign main” or a “foreign non-main” proceeding. Unlike a voluntary Chapter 11 reorganization petition, a Chapter 15 petitioner is not entitled to an immediate order of relief recognizing it as a U.S. debtor. Accordingly, the foreign petitioner is not entitled to the benefits of the “automatic stay” or any other U.S. bankruptcy law protections (unless the court provides so on an interim basis) until the petition is granted. The Chapter 15 petition may be opposed by the foreign debtor’s creditors or other parties in interest, who must receive notice of the date set (usually at least 20 days after the petition is filed) for the recognition hearing. Even if no objections are filed, recognition is far from automatic.

In In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007), aff’d, 389 B.R. 325 (2008), the court considered and rejected the unopposed application of joint provisional liquidators appointed by a Cayman Islands court for recognition of the Cayman Islands proceeding under Chapter 15. In determining that the Cayman Islands proceeding was not a “foreign main proceeding,” the court relied on the fact that “the only adhesive connections” that the Bear Stearns Funds had with the Cayman Islands were that “they are registered there.”

The court went on to note that the Funds had:

no employees or managers in the Cayman Islands, the investment manager for the Funds is located in New York, the Administrator that runs the back-office operations of the Funds is in the United States along with the Funds’ books and records and prior to the commencement of the Foreign Proceeding, all of the Funds’ liquid assets were located in the United States.

In light of these facts, the court held that the Cayman Islands was not the center of the Funds’ main interests, and thus, the Cayman Islands liquidation proceeding was not a foreign main proceeding under Chapter 15.

The court also held that the Cayman Islands liquidation proceeding was not a foreign non-main proceeding under Chapter 15 because the Funds did not have an “establishment” in the Cayman Islands for the conduct of non-transitory economic activity—essentially, “a local place of business.” The Cayman Islands proceeding did not meet the definition of a non-main proceeding.

The recent decision of a leading bankruptcy judge, Judge Gropper, in In re Millennium Global Emerging Credit Master Fund Ltd., 458 B.R. 63 (Bankr. S.D.N.Y. 2011), provides the type of evidence that must be considered in making the COMI determination (which is not particularized in the Bankruptcy Code).

Drawing on case law, Judge Gropper considered the COMI factors to be:

• location of debtor’s headquarters;
• location of those who manage debtor;
• location of debtor’s primary assets;
• location of majority of debtor’s creditors or creditors who would be affected;
• jurisdiction whose law would apply to most disputes; and
• whether the COMI would be “ascertainable to third parties.”

The Millennium Global court applied its analysis to the facts to provide a “tally” that demonstrated more factors pointing to Bermuda than elsewhere. Judge Gropper further held that the Funds had “an establishment” in Bermuda at the outset of their liquidation, so that it would qualify as a foreign non-main proceeding. In contrast to the Cayman Islands’ “letter box” in Bear Sterns, the Funds “carried out nontransitory economic activity sufficient to constitute an ‘establishment’ in Bermuda” and to qualify their liquidation there as a non-main proceeding—if not a main proceeding.

More recently, in In re Ashapura Minechem Ltd., 480 B.R. 129 (S.D.N.Y. 2012), the New York District Court was asked by another Chapter 15 debtor, Armada (Singapore) Pte Ltd., to reverse the bankruptcy court’s recognition of Ashapura’s Chapter 15 petition based upon its proceeding before India’s Board for Industrial and Financial Reconstruction under the poignantly named Sick Industrial Companies Act (“SICA”). There was no question that Ashapura’s COMI was in India. Armada argued, however, that the SICA proceeding did not qualify as a “collective proceeding” benefiting and providing a distribution to all creditors. The district court rejected this and other challenges to the bankruptcy court’s recognition of Indian proceeding—suggesting a low bar to recognition.

Other Issues

PLACE OF INCORPORATION

Although for COMI purposes there is a presumption that the place of incorporation is an entity’s COMI, this is, as Judge Sweet noted in affirming in Bear Sterns, “no more than a rebuttable evidentiary presumption” that the lower court had correctly rejected on the basis that “the proposition that the Foreign proceedings are main proceedings because the Petitioners say so and because no [one] else says they aren’t is unsound.”

Time for Determining COMI

In addressing a threshold issue in Millennium, Judge Gropper considered the “few cases” determining whether COMI or an “establishment” exists as of the date of the filing of the Chapter 15 petition. He rejected their “present tense” analysis of the statute to hold:

The substantive date for the determination of the COMI issue is the date of the opening of the foreign proceeding for which [U.S.] recognition is sought.

Conclusion

U.S. bankruptcy courts will not “rubber stamp” Chapter 15 petitions for recognition of a foreign proceeding. And, as shown in Bear Sterns, the petitioner’s assertion that it has a valid pending foreign proceeding will not simply be accepted in the absence of objection. Once recognized, however, the foreign petitioner not only obtains the protection of assets in the U.S. from attack by creditors, but may also seek discovery “of information concerning the debtor’s assets, affairs, rights, objections, or liabilities.” Where an outside liquidator has been brought in, this potential for U.S. discovery may provide a significant opportunity for asset tracing.

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