CBInsolvency LLC

Thought Leadership

Part 1 : The Implications of Brexit for the Restructuring and Insolvency Industry

United States of America*

Hon. Leif Clark (Ret.)**


Daniel M. Glosband***



Unless Brexit stimulates changes to the internal United Kingdom laws that apply to insolvency and restructuring (including the interpretation of applicable common law), US insolvency professionals can safely sleep through the UK’s great escape from the European Union (although they may want to take advantage of the Brexit-driven drop in the exchange rate and the enhanced purchasing power of the dollar). The excellent “centrepiece” essay by Gerard McCormack and Hamish Anderson – “The Implications of Brexit for the Restructuring and Insolvency Industry in the United Kingdom” (“Centrepiece”) – comprises six sections:

the current cross-border insolvency landscape – pre-Brexit; the current corporate restructuring law – pre-Brexit; how current law deals with foreign insolvency proceedings that purport to deal with English law governed obligations; the effect of a “hard” Brexit resulting in separation from the European Insolvency Regulation (“EIR”); what the UK and EU might each do to fill the gap; and the terms of a possible replacement regime.


This essay will review the scenarios for inbound US cross-border insolvency and restructuring proceedings emanating from the UK. It will also consider certain of the deficiencies in the current approach to assisting US insolvency proceedings outbound to the UK, with a view to supporting positions discussed in the Centrepiece. The likely Brexit from the EIR – itself not very relevant to the US insolvency community – is not discussed.


Brexit alone is not likely to dampen the US receptivity to UK restructuring and insolvency proceedings, so the current landscape under chapter 15 for cross-border insolvency assistance and recognition of insolvency proceedings and schemes of arrangement (“Schemes”) will remain unaltered. Conversely, Brexit will not directly breach the barricades that English courts interpose to assisting foreign insolvency proceedings.1  Since chapter 15 has no reciprocity requirements, US courts have not closed their doors to UK cases because of the UK’s parsimonious approach to assisting foreign insolvency proceedings. Brexit will

not change the attributes of UK proceedings that render them eligible for chapter 15 recognition, so Brexit should not make any difference to US courts’ decisions on recognition and relief under chapter 15.


The Centrepiece suggests possible salutary post-Brexit changes to the limitations imposed by the Gibbs principle, constraints on relief available under the Cross-Border Insolvency Regulations, restriction to former British Commonwealth members of section 426 of the Insolvency Act 1986 and the limited adoption of the Model Law by additional EU Member


*      The views expressed in this essay are the personal views of the authors, which are not to be taken as representing the views of INSOL International or any of its affiliates or representatives.

**     Former Bankruptcy Judge, W.D. Texas; principle, CBInsolvency, LLC.

***   Retired Partner and Of Counsel, Goodwin Procter LLP; principle, CBInsolvency, LLC.

1      See Centrepiece, p. 5 (“The presently restrained approach to judicial innovation is likely to continue.”).


States. Ameliorative changes to any of these impediments to universality would be welcome, but will not automatically follow Brexit.




In 2005, the US adopted its version of the UNCITRAL Model Law on Cross-Border

Insolvency as chapter 15 of the Bankruptcy Code, Ancillary and Other Cross-Border Cases.2

Chapter 15 is divided into several subchapters that address general provisions, access of foreign representatives and creditors to courts in the United States, recognition of foreign proceedings and relief, cooperation with foreign courts and foreign representatives and coordination of concurrent proceedings. Insofar as possible and as recommended by the UNCITRAL Guide to Enactment and Interpretation of the Model Law, chapter 15 follows the language, section numbering and general structure of the Model Law to promote uniformity in its adoption and application. The Cross-Border Insolvency Regulations 20063 (“CBIR”) also track the Model Law and provide that it shall have the force of law, in the form appended as Schedule 1.4 The Model Law was nipped, tucked and adapted to accommodate existing legislation in both the US and the UK but, unlike the CBIR, chapter

15 became part of an existing statute and not a separate statutory instrument. While there are a handful of chapter 15-specific provisions in the US Federal Rules of Bankruptcy Procedure and in the accompanying Official Forms, the CBIR is accompanied by more expansive Procedural Matters (separate for (i) England and Wales and (ii) Scotland) and Forms. 5


Both the US and UK versions of the Model Law embody provisions and procedures for “recognition” designed to test the eligibility of a foreign insolvency proceeding to request assistance from the respective domestic courts. In each case, recognition requires that there be a “foreign proceeding”, commenced by a “foreign representative”, on a prescribed form of application (or petition); and that the foreign proceeding be a “foreign main proceeding” or a “foreign nonmain proceeding”. Recognition is specifically subject to the condition of Article 6, Schedule 1 (CBIR) and section 1506 (chapter 15); i.e. that it not be manifestly contrary to public policy. Each of the recognition elements is discussed in detail below in the context of analyzing the recognition and enforcement of Schemes.


As signaled in the Centrepiece and discussed below, the structural and terminological similarities between chapter 15 and the CBIR diverge when it comes to the relief that will actually be granted in reliance on the respective versions of the Model Law. US Courts treat the relief provisions of chapter 15 as empowering them to grant relief based on the statutory language, consistent with the overarching principles of comity and constrained only to assure sufficient protection of affected parties and the absence of a manifest violation of US public policy.6  Subject to the same conditions, US courts will apply foreign law when

appropriate.7  The UK courts add a barrier of anachronistic principles which, in their view, the


2      The Bankruptcy Code is Title 11 of the United States Code, 11 U.S.C. §101, et seq.

3      2006 SI 2006/1030.

4      CBIR, Reg. 2(1).

5      See, e.g., Federal Rules of Bankruptcy Procedure 1004.2, Petition in chapter 15 Case and 2002(q), Notice of Petition for

Recognition of Foreign Proceeding and of Court’s Intention to Communicate with Foreign Courts and Foreign Representatives, Official Form 401, Petition for Recognition of a Foreign Proceeding; cf. CBIR Schedule 2, Procedural Matters in England and Wales, CBIR Schedule 3, Procedural Matters in Scotland, CBIR Schedule 5, Forms.

6      See, e.g. In re AJW Offshore, Ltd., 488 B.R. 551, 559 (Bankr. S.D.N.Y. 2013) (finding that the foreign representative could, via section 1521(a)(7) [“granting any additional relief that may be available to a trustee…”] employ the turnover powers of ss.

542 and 543 to obtain books and records, subject to providing sufficient protection to creditors and other interested parties).

7      Fogerty v. Petroquest Res., Inc. (In re Condor), 601 F.3d 319, 329 (5th Cir. 2010) (“[a]s chapter 15 was intended to facilitate

cooperation between US courts and foreign bankruptcy proceedings, we read section 1521(a)(7) in that light and hold that a court has authority to permit relief under foreign avoidance law under the section.”); In re Hellas Telecommunications (Luxembourg) II SCA, 525 B.R. 543, 568 (“The Plaintiffs allege various avoidance claims under foreign law, which may be

adjudicated by this Court under chapter 15 of the Bankruptcy Code.”).


CBIR did not supersede.8  Lord Neuberger understated the divergence: “The extent to which the Model Law promotes substantive universalism (i.e. the application of the law governing the foreign insolvency proceeding) appears to be answered differently in different jurisdictions. Thus, the US courts seem to have adopted a rather more universalist approach than the courts of the UK.”9 Even though the CBIR have the force of law, the English courts seem to require reassurance that Parliament meant what it said.





The friendly Americans began recognizing and enforcing Schemes before chapter 15 was adopted.10  Attributes of Schemes that might cause UK courts to deny assistance to an analogous US proceeding have not discouraged US courts from embracing Schemes. For example, the primary reason to seek chapter 15 recognition of many UK Schemes is to ensure enforcement in the US of modifications of US law-governed debt (usually New York law). But the Gibbs principle would appear to prevent a UK court from enforcing a US reorganization plan that modified English law-governed debt:


“There is a long-established  principle of the common law that the discharge of a debt under foreign insolvency law will not be given effect in the UK where the contract creating the debt is governed by English law. This doctrine is reflected in Gibbs v La Société Industrielle et Commerciale des Métaux where it was held that the foreign bankruptcy law was irrelevant because it was “not a law of the country to which the contract belongs, or one by which the contracting parties can be taken to have agreed to be bound; it is the law of another country by which they have not agreed to

be bound.” (Footnotes omitted.)11


The High Court has recently recognized a chapter 11 proceeding of a UK-registered debtor whose COMI was in the US but the debtor’s reorganization plan apparently did not implicate non-consensual modification of English law-governed debt.12  19 Entertainment Limited (“19

Entertainment”) was one of nearly 50 direct and indirect subsidiaries of CORE Entertainment Inc. (“CORE Group”) which all filed chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware on April 28, 2016. The CORE Group is perhaps best

known as the producer of American Idol. Unique among the members of the CORE Group,

19 Entertainment was incorporated in England and had its registered office in London.


The CORE Group defaulted on its secured bank debt and 19 Entertainment’s former CEO served a demand for nearly $3 million that could have led to winding-up proceedings in the UK. To prevent this, 19 Entertainment sought recognition of its chapter 11 case under the CBIR. On the day following the chapter 11 filings, the UK court heard and granted 19

Entertainment’s application for recognition, apparently on an ex parte basis.13  The decision

illustrates the contrast between the English common law approach and the UNICTRAL Model Law approach embodied in the CBIR. The former permits assistance only to foreign proceedings of companies domiciled in the foreign jurisdiction while the latter permits


8      See the discussion of Gibbs at Centrepiece at 8, 9, of Singularis at 5 and Pan Ocean at 11.

9      Keynote speech on June 19, 2017 to the International Insolvency Institute (III) Annual Conference 2017, London.

10    See, e.g. In re Board of Directors of Hopewell International Insurance Ltd., 275 B.R. 699 (S.D.N.Y. 2002).

11    Centrepiece, at 8, 9.

12    In re AOG Entertainment, Inc., et, al, Case No. 16-11090-smb (Bankr. S.D.N.Y. 2016).

13    Re 19 Entertainment Limited [2016] EWHC 1545 (CH), (England and Wales High Court (Chancery Division) April 29, 2016)

(“UK Decision”).


assistance to companies which have their domicile in the forum country and their center of main interests (or an establishment) in the foreign jurisdiction.14  As the UK Court notes:


“…it is very clear that, although the registered office of the company is in London, at

New Bridge Street, it is, in fact, the paradigm case of a letterbox company because

its business, direction and operation is now entirely conducted in the United States of America and, in particular, in Los Angeles. It has closed down, as I mentioned a moment ago, its London office; its directors are United States citizens and are resident there. Its board meetings are held in the United States. The Company’s website, or rather that of the group to which it belongs, makes it clear that it is a Los Angeles-based  concern with a Los Angeles telephone number. Further, the major creditors of the company are in the United States and its business dealings are also conducted there, as is its banking …. In my judgment, the fact that its COMI is situated in that country is extremely clear and I shall approach this case on that basis.”15


The UK Court goes on to find similarities between chapter 11 and “the administration order regime applicable in England” and acknowledges that “… the effect of the Model Law is to give to the English court the possibility of enabling the position of a company which is in chapter 11 Bankruptcy in the United States, to be put on a similar footing in England with regard to any action against it by creditors, such as it would be if proceedings were being conducted in the United States.”16


Before granting relief, the UK Court addressed the requirements that the 19 Entertainment’s chapter 11 case be a “foreign proceeding” and that the applicants, the debtor’s directors, be foreign representatives. The UK Court easily concluded that the chapter 11 was a foreign proceeding under Article 2 of the Model Law and the 2006 Regulations; i.e. “a collective judicial or administrative proceeding in a foreign state pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court for the purpose of reorganisation or liquidation.”17


To conclude that the applicants comprised a foreign representative under Article 2; i.e. “a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding,” the UK Court relied on an affidavit of the debtor’s US counsel. The evidence explained that section 1107 of the Bankruptcy Code gave the debtor in possession the functions and duties of a trustee and that this sufficed to qualify the directors as foreign representatives.


The UK Court (Jeremy Cousins, QC sitting as a Deputy Judge of the High Court) entered an order recognizing the chapter 11 case as a foreign main proceeding (triggering an automatic stay under Article 20 of Schedule 1 of the CBIR) and also entered discretionary relief specifically staying enforcement of security, seizure of assets, appointment of an administrative receiver and the presentment of any winding-up petition or application for appointment of an administrator:


“I turn then to the question of discretionary relief. As I have explained already, there is a degree of urgency in the matter which is now before me, in the light of Mr. Fuller’s position and in the light of his entitlement, within a matter of days, to commence


14    See Northshore Mainland Services, Inc., et al, Commonwealth of the Bahamas Supreme Court, 2015/COM/Com/00039 (July 31, 2015) (Bahamas court applies English common law in denying recognition of a US chapter 11 case filed by a Bahamian debtor).

15    UK Decision at paras 4, 6.

16    UK Decision, at paras 10, 11.

17    UK Decision at para. 14.


winding up proceedings. If discretionary relief were to be granted, he would not be able to take that step, nor would other creditors. In my judgment, it is entirely consistent with the policy behind the adoption of the Model Law that I should grant relief of a kind which is similar to the moratorium relief provided in para. 43 of sch. B1 of the 1986 Act.”


The English court was not faced with the ultimate Gibbs question since 19 Entertainment’s former CEO settled his disputes with the Core Group in the context of resolving his objection to its plan of reorganization.18

In contrast to the one recognition of a chapter 11 case under the CBIR, we found thirty-one English schemes of arrangement recognized under chapter 15 (unless we missed a couple),19  as well as a few from other former British Commonwealth countries.20


In many of these cases, the foreign representative also sought “additional relief”, with the primary relief comprising what the US vernacular denominates as “third-party releases,” or releases of one non-debtor third party by other non-debtor third parties, accompanied by complementary injunctions. The third-party releases, discussed in more detail below, have regularly been enforced.




Section 1517 of the Bankruptcy Code sets forth the requirements for recognition of a foreign proceeding. If these requirements are met and if recognition would not be “manifestly contrary” to the public policy of the United States, a bankruptcy court should issue an order granting recognition of a foreign proceeding as either a “foreign main” proceeding or a “foreign nonmain” proceeding.21  Sections 1521 and 1522 set forth the provisions for



18    Findings of Fact, Conclusions of Law and Order Confirming Second Amended Joint Chapter 11 Plan of Reorganization for AOG Entertainment, Inc. and Its Affiliated Debtors, In re AOG Entertainment, Inc., et al, Case No. 16-11090 (BANKR. S.D.N.Y. Sept. 23, 2016).

19    In re Metinvest B.V., No. 17-10130-LSS (Bankr. D. Del. Feb. 8, 2017); In re DTEK Finance (plc), No. 16-13521-shl (Bankr.

S.D.N.Y. Jan. 18, 2017); In re Abengoa Concessions Investments Limited, No. 16-12590-kjc (Bankr. D. Del. Dec. 8, 2016); In re Metinvest B.V., No. 16-11424-LSS (Bankr. D. Del. Jun. 30, 2016); In re EnQuest PLC, No. 16-12983 (Bankr. S.D.N.Y. Oct. 24, 2016); In re YH Limited, No. 16-12262 (Bankr. S.D.N.Y. Sep. 8, 2016); In re Metinvest B.V., No. 16-10105-LSS (Bankr. D. Del. Jan. 29, 2016); In re OIC Run-Off Limited, No. 15-13054-scc (Bankr. S.D.N.Y. Jan. 11, 2016); In re Codere Finance (UK) Limited, No. 15-13017-jig (Bankr. S.D.N.Y. Dec. 22, 2015); In re Towergate Finance, No. 15-10509 (Bankr. S.D.N.Y. Mar. 27, 2015); In re New World Resources N.V., No. 14-12226 (Bankr. S.D.N.Y. Sept. 9, 2014); In re Zodiac Pool Solutions SAS, No. 14-11818 (Bankr. D. Del. Aug. 29, 2014); In re hibu, Inc., No. 8-14-70323-reg (Bankr. E.D.N.Y. Feb. 27,

2014); In re Zlomrex International Finance S.A., No. 13-14138 (Bankr. S.D.N.Y. Jan. 31, 2014); In re Magyar Telecom B.V.,

2013 WL 10399944, No. 13-13508 (Bankr. S.D.N.Y. Dec. 11, 2013); In re Allianz Global Corporate & Specialty (France), No.

10-4990-smb (Bankr. S.D.N.Y. Nov. 4, 2011); In re Tokio Marine Europe Ins. Ltd., No. 11-13420-mg (Bankr. S.D.N.Y. Sep.

8, 2011); In re Hellas Telecomms. (Luxembourg) V, No. 10-13651 (Bankr. D. Del. Dec. 13, 2010); In re Baloise Insurance

Ltd., No. 10-15358-jmp (Bankr. S.D.N.Y. Dec. 9, 2010); In re Highlands Ins. Co. (U.K.), No. 07-13970 (Bankr. S.D.N.Y. Aug.

18, 2009); In re Minister Insurance Co. Ltd., No. 10-bk-13899 (Bankr. S.D.N.Y. Sept. 1, 2010); In re Castle Holdco 4, Ltd., No. 09-11761 (Bankr. S.D.N.Y. May 7, 2009); In re Global General and Reinsurance Co. Ltd., No. 08-14939 (Bankr. S.D.N.Y. Jan. 21, 2009); In re Sphere Drake Insurance Limited, No. 08-12832-jlg (Bankr. S.D.N.Y. Sep. 11, 2008); In re Grayfriers Insurance Company Limited.,  No. 07-12934 (Bankr. S.D.N.Y. Oct. 23, 2007); In re Compagnie Européenne d’Assurances Industrielles S.A., No. 07-12009-mg (Bankr. S.D.N.Y. Sep. 26, 2007); In re Endresen (Oslo Re UK), No. 07-

12211 (Bankr. S.D.N.Y. Aug. 29, 2007); In re AXA Insurance UK PLC, No. 07-12110 (Bankr. S.D.N.Y. Aug. 15, 2007); In re Europaische Ruckversicherungs-Gesellschaft in Zurich, No. 06-13061 (Bankr. S.D.N.Y. Jan. 22, 2007); In re Gordian RunOff (UK) Ltd., f/k/a/ GIO (UK) Ltd., No. 06-11563 (Bankr. S.D.N.Y. Aug. 29, 2006); In re Lion City Run-Off Private Ltd., No. 06-10461 (Bankr. S.D.N.Y. Apr. 13, 2006); In re La Mutuelle du Mans Assurances IARD, U.K. Branch), No. 05-60100,

2005 WL 3764946 (Bankr. S.D.N.Y. Dec. 7, 2005).

20    See, e.g., In re Cell C Proprietary Limited, case No. 17-11735 (Bankr. S.D.N.Y. July 27, 2017); In re Winsway Enterprises

Holdings Limited, No. 16-10833-mg (Bankr. S.D.N.Y. Jun. 16. 2016) (Hong Kong); In re Kaisa Group Holdings Ltd., No. 16-

11303-shl (Bankr. S.D.N.Y. Jul. 14, 2016); In re Murray Holdings Limited, No. 15-11231-mg (Bankr. Jun. 25, 2015); In re LDK Solar Co. Ltd. (in Provisional Liquidation), No. 14-12387 (PJW) (Bankr. D. Del. Nov. 21, 2014); In re Chartis Excess Limited, No. 13-10888-shl (Bankr. S.D.N.Y. May 1, 2013) (Ireland; no third-party release); In re Arion Insurance Company Limited, No. 07-12108-rdd (Bankr. S.D.N.Y. August 9, 2007) (Bermuda).

21    Section 1517(a), (b)(1)-(2); s. 1506.




additional relief that may be granted upon recognition and the conditions to granting such additional relief.


As a threshold matter, the United States Court of Appeals for the Second Circuit22  has held that a debtor that is the subject of a foreign proceeding must meet the requirements of section 109(a) of the Bankruptcy Code before a bankruptcy court may grant recognition of the foreign proceeding in chapter 15.23 Section 109(a) provides the general criteria for eligibility to be a debtor under the Bankruptcy Code, and requires specifically that a debtor either reside, have a domicile, a place of business, or property in the United States. The decision in the Barnet case has been criticized.24  As a practical matter, there is a very low threshold for satisfaction of the section 109(a) requirement. Either an attorney retainer account or contract rights under a US-law debt indenture constituted property that satisfied the Section 109(a) debtor eligibility requirements.25


Section 1517(a) provides that, subject to section 1506 (the public policy exception) an order recognizing a foreign proceeding shall be entered, after notice and a hearing, “if – (1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning of [section 1502]; (2) the foreign representative applying for recognition is a person or a body; and (3) the petition meets the requirements of [section 1515].”26  Section 1517 employs terms defined elsewhere in the Bankruptcy Code and implicates those definitional provisions among the requirements for recognition. Specifically, section 101(23) defines “foreign proceeding”, section 101(24) defines “foreign representative”, section 1502(4) defines “foreign main proceeding” and section 1502(5) defines “foreign nonmain proceeding.”


Section 101(23), states:


The term “foreign proceeding” means a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, 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.


US bankruptcy courts interpret section 101(23) as imposing a seven-part test, each element of which must be satisfied before a proceeding may qualify as a “foreign proceeding” within the scope of chapter 15. These elements are (i) the existence of a proceeding; (ii) that is either judicial or administrative in nature; (iii) that is collective in nature; (iv) in a foreign country; (v) authorized or conducted under a law related to insolvency or the adjustment of



22    The Federal courts for Connecticut, Vermont and the Eastern, Northern, Southern and Western Districts of New York comprise the Second Circuit.

23    In re Barnet (Drawbridge Special Opportunities Fund LP), 737 F.3d 238, 247 (2d Cir. 2013); In re Suntech Power Holdings

Co., Ltd., 520 B.R. 399 (Bankr. S.D.N.Y. 2014).

24    See In re Berau Capital Resources Pte Ltd, 540 B.R. 80, 81-82 (Bankr. S.D.N.Y. 2015), citing Daniel M. Glosband and Jay

Lawrence Westbrook, “Chapter 15 Recognition in the United States: Is a Debtor ‘Presence’ Required?”, 24 Int. Insolv. Rev.

28 (2015).

25    In re Berau Capital Resources Pte Ltd, 540 B.R. at 84 (Bankr. S.D.N.Y. 2015); See also In re Cell C Proprietary Limited, case No. 17-11735 (Bankr. S.D.N.Y.July 27, 2017); In re Inversora Electric de Buenos Aires S.A., 560 B.R. 650, 654 (Bankr. S.D.N.Y. 2016) ; In re Yukos Oil Co., 321 B.R. 396, 407 (Bankr. S.D. Tex. 2005); In re Global Ocean Carriers Ltd., 251 B.R.

31, 38-39 (Bankr. D. Del. 2000). Following the decision by the Second Circuit in the Barnet case, the foreign representative

in that case again sought recognition and the bankruptcy court, applying the Second Circuit’s ruling, held that cash in a client trust account maintained by the foreign representatives’ US counsel satisfied the section 109(a) requirement. In re Octaviar Administration Pty Ltd. (Debtor in a Foreign Proceeding), 511 B.R. 361, 372 (Bankr. S.D.N.Y. 2014) (the court also found that causes of action manifested in US-filed lawsuits also satisfied s. 109(a)).

26    Section 1517(a)(1)-(3). Section 1506 provides: “Nothing in this chapter prevents the court from refusing to take an action

governed by this chapter if the action would be manifestly contrary to the public policy of the United States.” A Scheme is roughly analogous to a consensual restructuring under chapter 11 of the Bankruptcy Code in which a sufficient majority of impacted creditors have, after notice of the proposed terms, voted to accept their treatment under the plan and the plan is

ultimately approved by the Court. Therefore, it is consistent with US public policy.




debts; (vi) in which the debtor’s assets and affairs are subject to the control or supervision of a foreign court; and (vii) which proceeding is for the purpose of reorganization or liquidation.27


A Scheme is a “proceeding”


For purposes of section 101(23), the Betcorp opinion endorses the broad definition of “proceeding” suggested by the EC Regulation on Insolvency Proceedings 1346/2000 and characterizes the essence of a proceeding as “acts and formalities set down in law so that courts, merchants and creditors can know them in advance, and apply them evenly in practice.”28 A Scheme meets the definition of a “proceeding.”29  In this case, the statutory framework is Part 26 of the UK Companies Act 2006, which sets forth the requirements for the company to apply to the English Court to initiate and implement a process by which its debts may be adjusted. The Scheme is subject to the provisions of the Companies Act 2006 and the company will be under the direction of the English Court up to and including final approval of the Scheme.


A Scheme is judicial in nature


A proceeding is deemed “judicial in nature” under section 101(23) where the proceeding is subject to review by a court.30  An order of the English Court is required in order to convene a meeting of affected creditors and to sanction the Scheme before the Scheme can become effective. Because the procedures established by the Companies Act 2006 mean that involvement and oversight of the English Court is required to utilize the scheme of arrangement procedure, the Scheme clearly qualifies as “judicial in nature” under section



A Scheme is collective in nature


Section 101(23) also requires that the proceeding be “collective”. The legislative history of chapter 15 notes that it adopts the definition of “foreign proceedings” nearly verbatim from the Model Law.31 It also directs reference to the Model Law and the Guide as aids to interpreting chapter 15.32 The Guide, in turn, takes a broad view of collective proceedings which may include “a variety of collective proceedings … be they compulsory or voluntary, corporate or individual, winding-up or reorganization.”33 Case law takes a similar approach.34


A Scheme Takes Place in a Foreign Country


A Scheme self-evidently will take place in England before the English Court.






27    ABC Learning Centres, 728 F.3d 301, 307-08; In re Betcorp Ltd., 400 B.R. 266, 276-77 (Bankr. D. Nev. 2009); In re

Ashapura Minechem Ltd., 480 B.R. 129, 136 (S.D.N.Y. 2012).

28    Betcorp, 400 B.R. at 278.

29    The fact that a Scheme may be deemed to involve a solvent debtor is no obstacle to recognition under ch. 15. As the US Bankruptcy Court for the Southern District of New York has held, it is the nature of the proceeding and not the status of the

debtor which determines ch. 15 eligibility and there is no requirement that a foreign debtor in a foreign insolvency

proceeding must actually be insolvent in order to gain recognition under ch. 15. See In re Millard, 501 B.R. 644, 649-50 (Bankr. S.D.N.Y. 2013).

30    Betcorp, 400 B.R. at 280-81.

31    House Report 109-31, pt. 1, 109th Cong., 1st Sess. (2005) (“H.R. Rep.”) at 118.

32    Idem. at 109; See also footnote 9, supra.

33    Guide, para. 71.

34    Betcorp, 400 B.R. at 281; In re Gold & Honey, Ltd., 410 B.R. 357, 370 (Bankr. E.D.N.Y. 2009); ABC Learning Centres, 728

F.3d at 310 (internal citations omitted); In re Board of Directors of Hopewell Int’l Ins. Ltd., 275 B.R. 699, 707 (S.D.N.Y.





A Scheme is under a law “relating to insolvency or adjustment of debt”


A Scheme will be conducted under Part 26 of the UK Companies Act 2006 for the purpose of reorganization. Numerous US courts have held that this manner of reorganization under the provisions of Part 26 of the Companies Act qualifies for purposes of section 101(23).35


The assets and affairs of the Company are subject to the control of a foreign court


Section 1502(3) defines “foreign court” as a “judicial or other authority competent to control or supervise a foreign proceeding.” By virtue of the applicable provisions of the UK Companies Act 2006, the English Court has direct supervisory authority over a Scheme. In light of the direct involvement of the English Court in considering the application to convene a Scheme Meeting and entering a Convening Order and the requirement that the English Court ultimately sanction (approve) the Scheme, a Scheme certainly meets this element of the 101(23) analysis.36


A Scheme is for the purpose of reorganization


The final element of the 101(23) analysis requires that the proceeding be for a reorganization or liquidation purpose. US courts will often look to the debtor’s own description of the proceedings to determine whether they are for the purpose of reorganization or liquidation.37


A scheme of arrangement is a statutory process under the applicable provisions of the UK Companies Act 2006 for the adjustment of debts. As such, a Scheme is “for the purpose of reorganization” within the meaning of section 101(23).


A Scheme must qualify for recognition as a “Foreign Main Proceeding” or a “Foreign

Nonmain Proceeding”


In order to be recognized under chapter 15, a foreign proceeding must be either main or nonmain.38 The essence of the requirement that there be either COMI or an establishment as a condition to recognition, is the determination of the legislators that a debtor must have an economic presence in the country that is conducting the foreign proceeding to be eligible for assistance from courts in the United States.39


Section 1502(4) defines a foreign main proceeding as a “foreign proceeding pending in the country where the debtor has the center of its main interests.” Section 1502(5) defines a foreign nonmain proceeding as “a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.” While no Scheme has been denied recognition because of the absence of the debtor’s COMI or an establishment in the






35    See, e.g., In re New World Resources N.V., No. 14-12226 (Bankr. S.D.N.Y. Sept. 9, 2014); In re hibu, Inc., No. 8-14-70323- reg (Bankr. E.D.N.Y. Feb. 27, 2014); In re Magyar Telecom B.V., 2013 WL 10399944 (Bankr. S.D.N.Y. Dec. 11, 2013); In re Hellas Telecomms. (Luxembourg) V, No. 10-13651 (Bankr. D. Del. Dec. 13, 2010); In re Highlands Ins. Co. (U.K.), No. 07-

13970 (Bankr. S.D.N.Y. Aug. 18, 2009). See also the additional cases listed above.

36    Betcorp, 400 B.R. at 284.

37    Betcorp, 400 B.R. at 284-85 (noting that directors’ minutes stated that winding-up was for the purpose of liquidation).

38    In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 126-27 (Bankr. S.D.N.Y.

2007), aff’d, 389 B.R. 325 (S.D.N.Y. 2008).

39    In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325, 333-334 (S.D.N.Y. 2008). (“The objective criteria for recognition reflect the legislative decision by UNCITRAL and Congress that a foreign proceeding should not be entitled direct access to or assistance from the host country courts unless the debtor had a sufficient pre-

petition economic presence in the country of the foreign proceeding. See House Report at 110; s. 1509(b)(3).”).




UK, other UK proceedings have been rejected as neither “foreign main proceedings” or

“foreign nonmain proceedings”.40


The foreign representative must qualify


The foreign representative applying for recognition must be a person or a body authorized to act on behalf of the foreign proceeding. Typically, the debtor’s board of directors designates an officer to act as foreign representative for purposes of seeking chapter 15 recognition of a Scheme. Section 101(24) defines the term “foreign representative” as being “a person or body, including a person or body appointed on an interim basis, 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.”41  Under section 101(41), the term “person” includes an “individual”. The definition of foreign representative in section 101(24) closely follows the language of the Model Law, Article 2(d), which provides that a foreign representative be a “person…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.”42  This definition of “foreign representative” does not require that the individual be appointed by a foreign court or other judicial body.43

Instead, it is sufficient that the foreign representative be authorized to act “in the context” of a foreign bankruptcy proceeding, such as by resolution of the debtor’s board of directors authorizing the representative to commence foreign bankruptcy proceedings on the debtor’s behalf.44


The tricky issue of third party releases


In cases under chapter 7 (Liquidation) and chapter 11 (Reorganization) of the Bankruptcy Code, third-party releases are unusual and difficult or impossible to obtain.45  US bankruptcy courts have regularly recognized and given full force and effect to English schemes of arrangement that included third-party releases (i.e. of claims against third parties other than the debtor) and / or stays of actions against third parties.46  In December of 2013, the United



40    See In re Kemsley, 489 B.R. 346 (Bankr. S.D.N.Y. 2013) (Trustee of individual debtor denied recognition because debtor had neither his habitual residence / COMI nor an establishment in England). Recognition has also been denied when an individual debtor in an English bankruptcy was below the debt limits established by ss. 1501(c)(2) and 109(e) of the Bankruptcy Code. In re Steadman, 410 B.R. 397 (Bankr. D. N.J. 2009).

41    Section 101(24).

42    In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1045 (5th Cir. 2012); see also UNCITRAL Report of the Working Group on

Insolvency Law on the Work of the Eighteenth Session, para. 110, U.N. Doc. A/CN.9/419 (Dec. 1, 1995).

43    Vitro, 701 F.3d at 1047. See also In re OAS S.A., 533 B.R. 83, 90, 94-95 (Bankr. S.D.N.Y. 2015).

44    Idem. at 1047, 1049 (affirming recognition of foreign representatives nominated by boards of directors).

45    In re Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005); some judicial circuits (the 5th, 9th an 10th) prohibit them entirely. See, e.g. Resorts International v. Lowenschuss, 67 F. 3d 1394 (9th Cir. 1995), cert. denied 517 U.S. 1243, 116

S.Ct. 2497 (1996). The US District Court for the District of Delaware ruled in an appeal from a bankruptcy court order confirming a ch. 11 plan in In re Millennium Lab Holdings II, LLC, 2017 WL 1032992 that the releases of a non-debtor third

party’s non-bankruptcy fraud and RICO (a civil cause of action for acts performed as part of an ongoing criminal organization) claims against equity holders was beyond the power of the bankruptcy court. Under the peculiar limitations on

the jurisdiction that may be exercised by bankruptcy judges, who are not appointed under Art. III of the US Constitution and

who do not have lifetime tenure and protection against salary reduction, the Millennium Court, citing Stern v. Marshall, 564

U.S. 462 (2011), stated that a bankruptcy court does not have final adjudicatory authority over “a private right, that is, of the

liability of one individual to another.”

46    See, e.g. In re Magyar Telecom B.V., 2013 WL 10399944 (Bankr. S.D.N.Y. Dec. 11, 2013). Likewise, in Hellas

Telecommunications (Luxembourg) V, No. 10-13651, the United States Bankruptcy Court for the District of Delaware issued a similar order giving “full force and effect” to such an English scheme of arrangement and ordering broad injunctive orders that effected third-party releases. (Docket No. 38, Dec. 13, 2010). On February 27, 2014, the United States Bankruptcy Court for the Eastern District of New York in In re hibu Inc., No. 14-70323 granted recognition to an English scheme of arrangement as a “foreign nonmain proceeding” and entered an order giving effect to a series of releases required for implementation of the scheme. On September 9, 2014, the United States Bankruptcy Court for the Southern District of New York in In re New World Resources, N.V., No. 14-12226 granted recognition to an English scheme of arrangement as a “foreign main proceeding” and ruled that the scheme was entitled to full force and effect. The New World scheme of arrangement contemplated that existing scheme creditors would provide releases of the debtor and of affiliated persons and entities, including affiliates who had guaranteed the debtor’s obligations to the scheme creditors. US Courts have also

regularly granted recognition to schemes of arrangement emanating from former British Commonwealth countries other than




States Bankruptcy Court for the Southern District of New York entered an order granting recognition to an English Scheme and granting ancillary relief under sections 1520, 1521,

1507(a), 1509(b)(2)-(3), 1525(a) and section 105(a) of the Bankruptcy Code giving “full force and effect” to a Scheme and ordering broad injunctive orders that effected third-party releases. The courts that recognized and enforced Schemes that included third-party releases and complementary injunctive protection, primarily relied on precedent in US case law for the enforcement of third-party releases and related injunctions as additional relief upon recognition under chapter 15 where the releases are permissible under the law of the foreign proceeding, the affected parties had notice and an opportunity to be heard and the releases were approved by the foreign court.47  These decisions each recognize that section

1507 provides authority to approve the release provisions under the doctrine of international comity.48


Brexit will not affect any of the recognition factors or the conditions for obtaining additional relief. If debtors establish a sufficient connection to the UK to qualify as Scheme debtors and if they have either their COMI or an establishment in the UK, then the US will welcome them and continue to grant chapter 15 recognition.






By Hon. Leif M. Clark (ret.)