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This article is intended to provide the parties involved in a international or cross-border bankruptcy with some possible solutions where the bankruptcy proceeding itself takes place outside the United States, but creditors, assets, operations, subsidiaries or corporate parents are located within them.
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© Neil J. Saltzman, 2005. This article is intended to provide an overview only, and is not intended as legal advice Because of the global nature of today’s economy it is extremely common for corporations to have assets and operations in more than one country. But what happens when one of these multinational companies falls on hard times and is forced into bankruptcy? In a situation like this, where there is a bankruptcy proceeding in one country, and creditors, assets, operations, subsidiaries or corporate parents in another, unique complications arise. More than one jurisdiction is involved, and there may well be a lack of uniformity in the laws and policies they promote. [3- Bufford, et al., International Insolvency, Federal Judicial Center, 2001] Nonetheless, practical matters need to be resolved, and the trustee responsible for the debtor entity must do all that he can to ensure that assets are available to satisfy creditors. This article is intended to provide the parties involved in a international or cross-border bankruptcy with some possible solutions where the bankruptcy proceeding itself takes place outside the United States, but creditors, assets, operations, subsidiaries or corporate parents are located within them. Problems in International Bankruptcy Let’s assume that a company is involved in bankruptcy proceedings in Moscow. This company has assets in the United States. The bankruptcy proceedings in Moscow prevent creditors from filing independent claims against the company in Russia, automatically freezing any which may be pending, and forcing all creditors to channel any efforts to collect debts through the bankruptcy proceeding in Moscow. What happens, however, if creditors seek to circumvent the Russian bankruptcy, and submit lawsuits in the United States in an effort to lay their hands on the assets which are located there? If they succeed in this, those creditors will gain an advantage over those working within the framework of the Russian bankruptcy, and the distribution of the debtor’s assets will be unfair. It is the responsibility of the trustee, and the interest of other creditors, to prevent this from happening. Now assume that the circumstances are similar to those described above, except that the assets in the United States are registered in the name of a wholly owned subsidiary of the bankrupt company. While the Russian trustee is interested in “piercing the corporate veil” between the two companies, so that the assets located in the United States will be considered to belong to the bankrupt parent, and available to pay the parent’s debts, creditors of the subsidiary company race to file lawsuits against the subsidiary throughout the United States. How should the Russian trustee act to stop the loss of subsidiary assets before its too late? Even apparently simple matters can be complicated in an international bankruptcy situation: For instance, assume a bankruptcy proceeding is pending in the Russian bankruptcy court. In the course of reviewing documents the trustee discovers that there appears to be a bank account in New York that may contain corporate assets. When contacted, the New York bank is unwilling to provide information without a locally enforceable subpoena. How does the trustee quickly and cost effectively go about obtaining a US subpoena in support of the Russian bankruptcy? Problems like these, and many others, arise in connection with the management of both small and large bankruptcies, and can arise in connection with the bankruptcies of individuals as well. These problems can appear so complicated that trustees might even conclude that it is more cost efficient to abandon assets located abroad than to pursue them. This conclusion may be mistaken, however, because the United States Bankruptcy Code offers solutions to the problems that are worth investigating. Chapter 15 of the United States Bankruptcy Code Recognizing that the business world has become global, and moving toward a universal approach to bankruptcy proceedings while reserving US courts’ discretion to evaluate the fairness of foreign proceedings, the United States Congress enacted Section 304 of the US Bankruptcy Code in 1978. [4- Ibid.] Section 304 has recently been repealed and replaced with Chapter 15, entitled “Ancillary and Other Cross-Border Cases”, which has further increased the number of options available in support of foreign bankruptcy proceedings. Among the goals that Chapter 15 seeks to promote is the creation of “greater legal certainty for trade and investment”. The new Chapter 15 (adopted in April 2005 and scheduled to take effect in October 2005) incorporates the Model Law on Cross-Border Insolvency drafted by the United Nations Commission on International Trade and Law. The law provides solutions to many of the problems which arise in the context of cross-border bankruptcy, including those described above. In the context of proceedings permitted under Chapter 15, US courts can provide aid of various types in support of foreign bankruptcy proceedings, including the issuance of subpoenas, orders to turn over assets, the issuance of stays on pending actions, and other matters. The underlying assumption of Chapter 15 is that the mechanisms established in the law are best suited to bring about the fair and efficient administration of cross-border insolvencies and to protect the interests of all creditors and the debtor. The ancillary proceeding permitted by Section 304 and the new Chapter 15 is a more efficient and less costly alternative to initiating a full-scale bankruptcy proceeding. Chapter 15 has also added a new section relating to cooperation between US and foreign courts and representatives to ensure the sharing of information and coordination of foreign and American proceedings which concern the same debtor. The US courts have retained discretion whether to grant “additional assistance” in relation to a foreign proceeding. Section 304, and now Chapter 15, describes the main factors that the court must consider in making its decision whether to do so. Foremost among these factors is the issue of comity. In general comity will be granted to the laws of a foreign forum where they do not violate the laws or public policy of the United States and if the foreign courts act according to fundamental rules of procedural fairness. The US courts will examine the laws of the foreign jurisdiction for whose proceeding support is sought and will consider, among other things, whether the foreign jurisdiction treats creditors fairly, how it prevents the fraudulent transfer of debtors’ property, whether US creditors are protected against prejudice in the processing of claims there, and the manner in which assets are distributed. Where there is doubt on these issues the court may have to conduct an evidentiary hearing, and may require expert testimony regarding the foreign jurisdiction’s law in order to make a determination whether to grant the additional assistance requested. The law also sets forth procedural requirements and the rules regarding proper venue in relation to the pursuit of ancillary proceedings. It is beyond the scope of this article to set forth all of the many nuances of Chapter 15 and the opportunities it affords those seeking to enlist the aid of American courts in support of a foreign insolvency proceeding. However, it is in the interest of creditors, receivers, and debtors to be aware that these opportunities exist, and to become acquainted with the applicable rules in order to best take advantage of them. Neil J. Saltzman is an attorney admitted to the practice in the State of New York and in Israel |
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