Chapter 15 of the U.S. Bankruptcy Code is a crucial tool for handling cross-border insolvency cases. Essentially, it facilitates cooperation between U.S. courts and foreign courts in complex financial scenarios. Typically, Chapter 15 cases are filed when a foreign debtor has significant assets and/or creditors in the United States.
The Rise of Chapter 15:
The increasing prevalence of cross-border insolvency is evident in the surge of Chapter 15 filings. In 2024, the U.S. saw approximately 330 filings, a significant jump from 159 in 2023 and 89 in 2022. This trend underscores the growing need for a system to manage international financial distress.
Key Features of Chapter 15:
- Foundation:
- Enacted in 2005, Chapter 15 is modeled on the 1997 UNCITRAL Model Law on Cross-Border Insolvency, a standard adopted by over 50 countries.
- A foreign insolvency proceeding is a prerequisite for filing under Chapter 15. Without a foreign proceeding, a prospective debtor may not file Chapter 15.
- Foreign Representative:
- The process allows a “foreign representative” to seek U.S. court recognition.
- Claims:
- Unlike other bankruptcy chapters, Chapter 15 does not create a U.S. bankruptcy estate. Therefore, creditors do not file claims in U.S. bankruptcy court. Instead, claims are managed and resolved by the foreign court overseeing the debtor’s primary insolvency case.
- Automatic Stay:
- Once a U.S. bankruptcy court recognizes a foreign bankruptcy proceeding as a “main” proceeding under Chapter 15, the automatic stay takes effect, preventing creditors from taking certain actions against the debtor and their U.S. assets. The stay prevents creditors from commencing or continuing lawsuits, collecting debts, or taking other actions against the debtor or their U.S. property.
- Alternative Options:
- In cases with significantly complex U.S. assets, a debtor may opt for a full Chapter 7 or 11 bankruptcy filing.
Chapter 15 primarily functions to enforce foreign court orders and foster cooperation between U.S. and foreign jurisdictions. This has significant implications for businesses dealing with entities that have foreign parents.
- Risk: Conducting business with a customer that has a foreign parent inherently carries risk, especially in today’s globalized economy.
- Credit Management: It’s crucial to diligently monitor the financial health of the foreign parent. Upon detecting signs of financial distress, businesses should promptly adjust credit limits or eliminate credit exposure altogether if warranted to mitigate potential losses.
Understanding Chapter 15 intricacies and implications is essential for businesses operating in a global marketplace. By staying informed and adhering to strict risk management strategies, companies can navigate complexities and minimize potential losses.
