The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 adds to the U.S. Bankruptcy Code a new Chapter 15 to govern cross-border cases. Chapter 15 represents a significant departure from former Section 304 of the U.S. Bankruptcy Code, which is to be replaced in its entirety. A few of Chapter 15′s key provisions are summarized below.

Section 304 set forth limited procedures allowing a foreign representative to commence in the U.S. a case ancillary to a foreign proceeding and to thereby request injunctive relief, a turnover order, or “other appropriate relief” to prevent the piecemeal distribution of estate assets in the U.S. In contrast, Chapter 15 empowers U.S. courts and representatives to communicate directly with their foreign counterparts to facilitate cooperation in administering cross-border cases. While this represents a significant advance, cooperation?and compliance with Chapter 15?ends where it would otherwise lead to actions “manifestly contrary to the public policy of the United States.”

Chapter 15 improves access to U.S. courts by granting foreign representatives standing to sue in U.S. courts, apply directly to U.S. courts for relief, or to commence full bankruptcy cases upon compliance with certain procedural requirements. Section 1507 also permits the foreign representative to seek “additional assistance,” subject to consideration of factors substantially similar to those set forth in former Section 304. Chapter 15 cases are intended to be ancillary to foreign main proceedings unless a full bankruptcy case is commenced under another chapter. Even if such a case is commenced, Section 305 permits the U.S. court to stay or dismiss the full case and to limit the debtor to an ancillary case under Chapter 15.

In contrast to Section 304, which provided no automatic relief, upon recognition of a foreign main proceeding Section 1520 makes immediately applicable the automatic stay, adequate protection, and certain other provisions of the U.S. Bankruptcy Code, and the foreign representative is authorized to operate the debtor’s business and to use, sell, or lease the debtor’s property in the ordinary course of business. While these protections represent a significant advance for cross-border insolvency law, there remain many unresolved issues. For example, it is unclear what the outcome will be if a foreign court in which a main proceeding is pending authorizes postpetition financing for a debtor with operations in the U.S. Chapter 15 provides no guidance for determining priority and security issues when competing jurisdictions differ in their approach.

Chapter 15 was implemented in order to protect and maximize the value of a debtor’s assets and “to provide greater legal certainty for trade and investment as well as to provide for the fair and efficient administration of cross-border insolvencies, which protects the interests of creditors and other interested parties, including the debtor.” While Chapter 15 is not a complete solution, given the continuing trend towards globalization, and the improved access that foreign representatives will have to U.S. courts under Chapter 15, a solid understanding of the advantages, and the pitfalls, under Chapter 15 will be essential to dealing with cross-border insolvency cases in the years to come.

Authored by:

Mette H. Kurth

(213) 617-5501

mkurth@sheppardmullin.com