Chapter 15 of the Bankruptcy Code provides a mechanism for United States cooperation and coordination with insolvency proceedings abroad, often affording foreign debtors wide-ranging relief and expansive rights through the United States Bankruptcy Court system. Not all proceedings in foreign jurisdictions are eligible — in order to be so, a proceeding must constitute a “foreign proceeding” under the Bankruptcy Code. The Bankruptcy Code defines a “foreign proceeding” as “a collective judicial or administrative proceeding in a foreign country… under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” It is generally understood that the definition should be interpreted liberally. Recently, the Bankruptcy Court for the Southern District of New York tested the limits of Chapter 15, providing important guidance regarding the eligibility of proceedings that do not involve “insolvency or the identification, classification, or satisfaction of debt.” See In re Global Cord Blood Corporation, Case No. 22-11347 (December 5, 2022).
Following allegations that the board of Global Cord Blood Corporation (“Global Cord”) may have misappropriated corporate funds, the Grand Court of the Cayman Islands appointed joint provisional liquidators (“JPLs”) to generally perform an investigation and seek recoveries as might be appropriate. Global Cord is a Cayman company, and was primarily operated from the People’s Republic of China. In their effort to fulfill their duties, the JPLs commenced a Chapter 15 proceeding, seeking recognition of the proceeding in the Caymans and authority to conduct expansive discovery in the US, among other things. A purported shareholder of Global Cord challenged the request, arguing that the Cayman proceeding did not satisfy or meet the necessary criteria to be a “foreign proceeding.”
Bankruptcy courts have identified the following elements that must be satisfied in order to be deemed an eligible foreign proceeding: (a) there must exist a proceeding, (b) the proceeding must be judicial or administrative, (c) the proceeding must be collective in nature, (d) it must be in a foreign country, (e) the proceeding must relate to a law that relates to insolvency or debt adjustment, (f) the proceeding subjects the debtor’s assets and affairs to the control or supervision of a foreign court and (g) it is for the purpose of reorganization or liquidation. The shareholder argued that the Cayman proceeding failed to meet factors (c), (e) and (g) above.
The Bankruptcy Court was methodical in analysis. It concluded that, although not without question, the Cayman proceeding related to a law that itself relates to insolvency and adjustment of debts. The court reasoned that the test is not whether the proceeding concerns insolvency or adjustment of debt, but instead whether it is brought under a law that relates thereto. The order appointing the JPLs was premised on a provision of the Cayman Islands Companies Act that that did not require that the company be insolvent, and did not address the classification, adjustment, or resolution of debts. Nonetheless, the Bankruptcy Court identified other provisions in the act that do. Although the proceeding may not itself relate to insolvency or debt adjustment, it was commenced under a law that does and therefore satisfied that criteria for a “foreign proceeding” according to the court.
But that was not enough. The Cayman proceeding was not “collective” according to the Bankruptcy Court. It did not focus on the company’s creditors which Bankruptcy Courts have found to be the critical factor in determining collective status. Creditors had not received notice of the proceeding, there had been no effort to identify creditors, quantify and classify the company’s liabilities, or consider a methodology for making distribution, for example. Moreover, the Bankruptcy Court found that the proceeding was itself not for the purpose of reorganization or liquidation. Very generally, the order appointing the JPLs directed them to, among other things, (i) protect and preserve the company’s assets, (ii) to investigate and report on the company’s affairs, and (iii) to take collect and retain the company’s assets, and further barred proceedings against the company except with leave of court. Importantly, the order also authorized them to “commence winding up proceedings and/or any insolvency process in the Cayman Islands or any other country.” But they had not done so and there was no evidence that the proceeding was leading to a reorganization or liquidation. According to the Bankruptcy Court, the Cayman proceeding was “most akin to a corporate governance and fraud remediation effort, and is not a collective proceeding for the purpose of dealing with insolvency, reorganization, or liquidation” and denied recognition. Recognition was denied without prejudice, and the JPLs may, after further orders in the Caymans, return to the Bankruptcy Court for relief. The lesson for practitioners is clear. When the need or desire for Chapter 15 relief may be reasonably anticipated, orders appointing liquidators and administrators in foreign jurisdictions should be crafted in a manner that anticipates the key elements required for recognition in the US. They might include provisions for creditor notice and participation where such may not be otherwise required. Orders might expressly refer to relief under statutory provisions that relate directly to insolvency or refer to debt adjustment alternatives. And importantly, foreign directives, or the actions of the foreign representatives, should contemplate reorganization or liquidation in some manner.