A Tale of Two Chapters – “Recognizing” the Significant Differences Between Chapter 15 and Chapter 11 Bankruptcy Cases

In contrast to a case under Chapter 11 of the Bankruptcy Code, which centralizes a company’s debt adjustment efforts in the U.S. and provides for expansive oversight and supervision by a U.S. court, a Chapter 15 recognition proceeding is an ancillary proceeding in which the U.S. court acknowledges the foreign proceeding and gives it effect under applicable U.S. law. As many “common law” jurisdictions look to the governing law of the debt to determine whether there is effective compromise (the so-called Rule in Gibbs), a Chapter 15 recognition proceeding is a legal step for the U.S. court to formally recognize the effectiveness of the restructuring in the relevant jurisdictions.

This article will highlight the key distinctions between Chapter 15 proceedings and Chapter 11 proceedings. Sidley’s global restructuring team is well versed in these processes and would be pleased to provide further specific guidance as may be needed.

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Bankruptcy Code Basics
Article I, Section 8, of the U.S. Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” In 1978, Congress passed a statute, title 11 of the U.S. Code¹  (the “Bankruptcy Code”), to statutorily govern federal bankruptcy law in the U.S. The Bankruptcy Code has since been amended multiple times and, together with federal case law that has developed interpreting the Bankruptcy Code, serves as the framework that governs all bankruptcy cases.

Cases under the Bankruptcy Code

The Bankruptcy Code is divided into sub-chapters, which generally govern different types of proceedings. Chapters 1, 3, and 5 provide general provisions applicable across various of the types of proceedings. Chapter 7 generally covers liquidation proceedings, while Chapter 11 governs reorganization proceedings. Chapters 9 (municipal bankruptcy), 12 (family farmers and fishermen), and 13 (individual reorganization) provide rules for specific types of debtors.

The main types of cases under the Bankruptcy Code are Chapter 7 cases, which are liquidation proceedings in which a trustee (similar to a liquidator) is appointed to take control of the company’s assets and sell them for distribution to creditors, and Chapter 11 cases, which are reorganization proceedings in which the company’s management stays in control and develops a plan for repayment of debts over time.

In a case commenced under Chapters 7, 11, 9, 12, or 13, a bankruptcy “estate” is created upon the commencement of the proceeding, and the provisions of the Bankruptcy Code will govern the debtor’s conduct following the commencement of the case, the rights of creditors (for instance, to vote on the proposed plan of liquidation or reorganization) (to the extent applicable), and the disclosure required to be provided by the debtor. The U.S. court will oversee the liquidation or restructuring of the debtor and the continuation or cessation of its business during the proceeding.

Cases under these chapters provide significant protection to the debtor, although they also impose significant burdens. There will be extensive disclosure by the debtor in the proceeding, and typically dozens, if not hundreds, of filings and hearings before the U.S. Bankruptcy Court.

Recognition Proceedings under the Bankruptcy Code

Chapter 15 is the codification of the U.S. adoption of the Model Law on Cross-Border Insolvency, promulgated by the United Nations Commission on Internal Trade (“UNCITRAL”). In adopting the UNCITRAL Model Law on Cross-Border Insolvency, Congress intended Chapter 15 “to be the exclusive door to ancillary assistance to foreign proceedings.”²   The principle objective of Chapter 15 is to grant comity to the orders of foreign courts, provided those rulings are not contrary to public policy.³   The main directive of Chapter 15 is to promote cooperation among U.S. courts and parties in interest as well as courts and other competent authorities of foreign countries involved in cross-border insolvency cases.

A Chapter 15 case is ancillary to, and recognizes, a foreign proceeding that is the principal proceeding governing the debtor and adjustment of its debts. The Chapter 15 recognition would be granted only after approval (sanction) of the underlying foreign proceeding (although sometimes the recognition proceeding will be filed in tandem with the foreign proceeding to streamline the process). Often there are no material assets of the company in the U.S., and the only liabilities are U.S. (often New York)-law governed bonds.

The U.S. court’s role in a Chapter 15 case is significantly more limited than its role in a main case under the Bankruptcy Code. The U.S. court will review the request for recognition to ensure it complies with the requirements of Chapter 15, which are (broadly) that:

1. the foreign proceeding sought to be recognized is either a foreign “main” proceeding (i.e., is proceeding where the debtor has its center of main interests (“COMI”), which is essentially where the debtor has a principal place of business ascertainable to third parties) or foreign “non-main” proceeding (i.e., where the debtor maintains an “establishment,” and carries out “non-transitory economic activities”);
2. the foreign representative applying for recognition on behalf of the debtor is a person or body authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding; and
3. the petition for recognition is accompanied by the required administrative filings.

If the requirements of Chapter 15 are met, the U.S. court will “recognize” the foreign proceeding and terms of the restructuring, including the discharge of debt, giving it effect in the U.S. under applicable federal and state law.⁴  With this legal step, there will be formal effect given under U.S. law to the compromise or arrangement in the underlying foreign proceeding. To be clear: In the Chapter 15 recognition proceeding, the U.S. court will not independently determine whether the company in question should be liquidated or the restructuring plan should be approved—this question will be for the foreign court overseeing the main proceeding.

Key Differences between Chapter 11 and Chapter 15

The chart below summarizes certain key differences between a Chapter 11 proceeding and an ancillary Chapter 15 recognition proceeding.
  

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In summary, cases under Chapter 11 of the Bankruptcy Code and recognition proceedings under Chapter 15 are both mechanisms used by companies seeking to address their debts, but their differences (both procedural and substantive) are vast. Crucially, the Chapter 15 proceeding principally enforces the orders of a foreign proceeding. Chapter 15 proceedings, which recognize and give effect to the orders in a foreign proceeding under applicable U.S. law, are a normal step in foreign restructurings and are becoming increasingly prevalent as the number of cross-border international restructurings continue to rise.

¹ 11 U.S.C. §§ 101–1532.
² H.R. Rep. No. 109-31, 109th Cong., 1st Sess. 110 (2005).
³ The public policy exception is intended to be invoked only under exceptional circumstances concerning matters of fundamental importance for the U.S. For example, if recognition of an order from a foreign proceeding might subject the foreign representative to U.S. criminal liability, the court may deny relief under the public policy exception.
⁴ See, e.g., In re Modern Land (China) Co., 641 B.R. 768, 776 (Bankr. S.D.N.Y. 2022) (holding that so long as a foreign court “properly exercises jurisdiction over the foreign debtor in an insolvency proceeding, and the foreign court’s procedures comport with broadly accepted due process principles, a decision of the foreign court approving a scheme or plan that modifies or discharges New York law governed debt is enforceable” under New York and federal law).