Chapter 15 Bankruptcy: Definition & Basics

Bankruptcy often seems complicated for individuals or businesses located in the United States when all of their assets and creditors are also based in this country. But when the procedure crosses international borders, it becomes even more complex.

International bankruptcy laws, termed Chapter 15 bankruptcy, are based on the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law.

The intention is to set up mechanisms for insolvency cases involving debtors, assets and creditors located in more than one country. Chapter 15 is one of the least-used types of bankruptcy in the United States system.

Anyone considering filing Chapter 15 bankruptcy should consider hiring an experienced attorney to assist.

Although most people are familiar with the term "bankruptcy," that doesn't necessarily mean that they understand the basic structure of this legal proceeding.

‌Filing for bankruptcy is a legal proceeding that is intended to give individuals and businesses relief from overwhelming debt while still providing their creditors at least partial repayments.‌

State courts have little to do with bankruptcy proceedings, which are handled in federal bankruptcy courts. The rules for filing and prosecuting petitions in bankruptcy court are described in the United States Bankruptcy Code. They can be so complicated that they are hard to handle without bringing in an experienced attorney.

There are several different types of bankruptcy cases, each with its own rules and forms. They are generally referenced by the chapter number in the U.S. Bankruptcy Code in which the type of bankruptcy is discussed.

The most common forms of bankruptcy are:

• ‌Chapter 7‌ (liquidation bankruptcy)
• ‌Chapter 13‌ (reorganization bankruptcy)

The rules and procedures for Chapter 15 bankruptcy are, for example, outlined in Chapter 15 of the Bankruptcy Code.

All types of bankruptcy negatively affect credit and can make it challenging to get new credit.

What type of bankruptcy is described in Chapter 15 of the Bankruptcy Code? Chapter 15 is sometimes referred to as international bankruptcy. It is based on the Model Law on Cross-Border Insolvency, promulgated in 1997 by the United Nations Commission on International Trade Law (UNCITRAL).

In 2005, the United States version of this model law was added to the United States Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The provisions are found in Chapter 15 and termed Chapter 15 bankruptcy.

‌The purpose of both Chapter 15 and the Model Law on Cross-Border Insolvency is to provide a mechanism for resolving bankruptcy cases where the debtor, creditors or assets are found in more than one country.‌

Since the law is based on a model law, a court's interpretation of Chapter 15 depends on the interpretation given by other countries that have adopted the model law. This promotes uniformity in cross-border insolvency matters.

Five objectives meant to realize this goal are specified in federal law at 11 U.S.C. § 1501. They are:

1. Promote cooperation between parties and courts in the United States with parties and courts of foreign countries involved in cross-border insolvency cases.
   
2. Establish greater legal certainty regarding cross-border insolvency for trade and investment.
   
3. Provide for the fair and efficient administration of cross-border insolvencies to protect creditor and debtor interests.
   
4. Protect and maximize value of the debtor's assets.
   
5. Protect investment and employment by assisting financially troubled businesses.
   

Because Chapter 15 is intended to promote cooperation and communication between U.S. courts and parties of interest with foreign courts and parties of interest in cross-border cases, the statute charges the U.S. Bankruptcy Court with cooperating to the maximum extent possible with foreign courts and foreign representatives.

In a typical Chapter 7 case – the most common type of bankruptcy – a debtor files a petition in the bankruptcy court near their residence or place of business, listing assets, debts and exempt property.

The court, through a trustee, gets input from creditors in determining the value of the assets and evaluating the exemption claims. In time, the trustee sells the assets, distributes the money to creditors, affirms exempt property to the debtor, and discharges all legally dischargeable debts.

A Chapter 15 case works quite differently. There are two ways it can be initiated:

1. ‌Foreign.‌ Typically, the debtor lives in a different country, and the primary bankruptcy proceeding is filed in that country. The U.S. Chapter 15 case is ancillary to the foreign case and can be filed by a foreign representative who petitions a U.S. court for recognition of the foreign proceeding. Chapter 15 gives direct access to the foreign representative for this purpose.
2. ‌Domestic.‌ Alternatively, if the debtor has substantial assets in the United States, a full Chapter 7 or Chapter 11 case is filed in the United States. Under Chapter 15 of the code, the U.S. bankruptcy court can allow a U.S. trustee to act in the foreign jurisdiction on behalf of the U.S. bankruptcy estate.

If the Chapter 15 bankruptcy is ancillary to a foreign proceeding, the petition must show that a foreign proceeding exists and that the person filing was appointed as the foreign representative. The U.S bankruptcy court can issue an order recognizing the foreign proceeding.

Once the foreign main proceeding is recognized, Bankruptcy Code provisions create an automatic stay that applies to creditors within the United States. At that point, the representative can participate as a party of interest or intervene in a pending U.S. insolvency case where the debtor is a party.

Chapter 15 provisions require that foreign creditors of the debtor are given notice and permitted to participate in the U.S. bankruptcy case.

In addition, a foreign representative can ask for other relief from the U.S. courts, including the right to transform the ancillary case into a full bankruptcy case.

If the foreign representative initiates a full bankruptcy case, the U.S. bankruptcy court generally has jurisdiction only over the debtor's assets located in the United States. This limitation prevents U.S. interference with the foreign main proceeding.

In some years there are very few Chapter 15 cases filed. The year 2020 saw a higher number of these filings than any previous year at 236 cases. The cases filed that year provide good examples of how these cases work.

These foreign companies filed for Chapter 15 bankruptcy in 2020:

• French media company Technicolor.
  
• Canadian tea distributor DAVIDsTEA.
• Australian airline Virgin Australia.
  
• Canadian circus company Cirque du Soleil Entertainment Group.
  

In another example, also in 2020, the U.S. Bankruptcy Court for the Southern District of New York recognized the Indonesian bankruptcy court's restructuring plan for the Indonesian Duniatex textiles group under Chapter 15. This was a reorganization bankruptcy, similar to a U.S. Chapter 11 case, but brought and prosecuted in Indonesian courts.

On June 26, 2020, the Indonesian court approved the Duniatex Group's reorganization plan, and on September 14, 2020, the bankruptcy court of the Southern District of New York granted this order full force and effect in this country.

In the same order, it permanently enjoined all parties from commencing a new action or taking any action inconsistent with the plan in the United States.

Chapter 11 and Chapter 15 have very different purposes in the Bankruptcy Code.

Any individual considering filing bankruptcy in this country should consider the various types of bankruptcy cases and determine which one would be more appropriate to their needs.

• Chapter 7 requires sale of all nonexempt assets, but discharges most types of remaining debt.
• Chapters 11 and 13 are reorganization bankruptcies, with the former available to almost anyone, while the latter is limited to those with regular income.

Chapter 15 bankruptcy is not an option for an individual filing a regular bankruptcy.

It is not an actual form of bankruptcy, but rather provides a framework for a foreign bankruptcy court and a United States bankruptcy court to coordinate on an insolvency case that involves several countries.

It sets out the procedures for the courts to work with each other to ensure that all creditors are treated equally and fairly, and to facilitate reorganization of an international company. Therefore, an insolvent bankrupt individual cannot simply file a Chapter 15 petition in bankruptcy court and should not include a Chapter 15 bankruptcy case in their options.