During the present downturn in the U.S. economy, opportunities exist for investors in global distressed asset markets. Purchasers and sellers involved in these markets should be aware of the various mechanisms that are available to transfer assets of distressed companies. Historically, asset sales under s. 363 of the Bankruptcy Code1 have proven to be cheaper and faster than purchasing distressed assets through a Chapter 11 reorganization. Recent cases have shown that s. 363 may be utilized in Chapter 15 cases to provide the mechanisms for an efficient acquisition in cross-border distressed situations, with the added protections of a court order. Most noteworthy is the application of Chapter 15 to sell assets of companies incorporated within the United States.
A s. 363 sale transfers the acquired assets free and clear of any liens, claims and encumbrances. Chapter 15 of the Bankruptcy Code, created by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,2 contains guidelines for the administration of ancillary and other cross-border cases and incorporates the Model Law on Cross-Border Insolvency, which was proposed by the United Nations Commission on International Trade Law in 1997.
As intended by Congress, Chapter 15 encourages cooperation between the United States and the courts in foreign countries with respect to transnational insolvency cases. Financially troubled businesses with operations or separate legal entities in several countries can maximize the value of the enterprise’s assets by conducting sales of assets approved by the courts in the United States and foreign countries.
A Chapter 15 proceeding is commenced by a “foreign representative” filing directly with the bankruptcy court a petition for recognition of the “foreign proceeding”. Chapter 15 does not limit foreign proceedings to those pending in the debtor’s home country in which its domicile, residence, principal assets or principal place of business were located. Instead, recognition may be obtained as either a “foreign main proceeding” or a “foreign nonmain proceeding”. Foreign main proceedings are those pending in the country where the debtor has the “center of its main interests”. Foreign nonmain proceedings are ancillary proceedings in a country where the debtor has an “establishment”, which is defined as any place of operations where the debtor carries out a non-transitory economic activity. Chapter 15 contains a presumption that a debtor’s registered office is the centre of the debtor’s main interests. If the debtor is incorporated in the United States, this presumption must be rebutted to establish that there is indeed a foreign main proceeding. The presumption can be overridden if the U.S.- incorporated entity has its headquarters, employees, decision-making functions, majority of sales and revenue in the foreign jurisdiction, or other factors indicate that its centre of main interests is in the foreign jurisdiction. Recently, in the Chapter 15 cases of In re Destinator Technologies Inc.,3 the United States Bankruptcy Court for the District of Delaware recognized the Canadian insolvency proceedings of one Canadian corporation and two Delaware corporations as foreign main proceedings.
Upon recognition, the Destinator Technologies cases were afforded certain protections that automatically apply as a matter of right to the property within the territorial jurisdiction of the United States under Chapter 15 of the Bankruptcy Code, including (i) the granting of adequate protection to creditors (s. 361); (ii) the enforcement of the automatic stay (s. 362), which applies immediately upon recognition of a foreign main proceeding; (iii) the use, sale or lease of property (s. 363); (iv) the avoidance of certain postpetition transfers of property (s. 549); (v) the ability to acquire property on behalf of the estate that is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case (s. 552); and (vi) the ability of the foreign representative to operate the debtor’s business. Prior to the actual recognition order, provisional relief was granted in the form of a preliminary injunction and approval of sale bidding procedures.
In Destinator Technologies, the stalking horse bidder was granted typical bid protections, including expense reimbursement and a break-up fee. Both courts approved debtor-in-possession financing where the stalking horse bidder was the lead lender. After sufficient notice of the sale procedures and the passage of the bid deadline, the Canadian court approved the sale to the stalking horse bidder, and its sale order was given full force and effect by the U.S. bankruptcy court. The U.S. sale approval order granted the purchaser the protections of a good faith purchaser under s. 363(m) of the Bankruptcy Code. By properly utilizing Chapter 15, the foreign and U.S. debtors were able to coordinate the sale of their assets located in the United States and elsewhere through one global sale process within seven weeks of the commencement of the insolvency proceedings.
This article was originally published in Commercial Insolvency Reporter, vol. 21, no. 4, April 2009.