- Shipping, Finance, and Insolvencies: The Black Swan Comes Home to Roost
- January 28, 2009 | Author: Jeremy J. O. Harwood
- Law Firm: Blank Rome LLP - Office
In 2007, in discussing the new Bankruptcy Code chapter, Chapter 15, in respect of foreign bankruptcy cases, we wrote “international financial markets ‘correct’ themselves . . . [t]he international shipping industry, which has seen all time highs in recent years, may ponder its own fate.”1 In March of this year our article on the same subject was followed by the question “A Homeport In The United States?” The Chapter 15 filing of Britannia Bulk PLC (“Brit Bulk”) in the New York Bankruptcy Court on November 17, 2008 is evidence of the Black Swan2 (“what you don’t know is more relevant that what you do know”) coming home to roost in the U.S. Bankruptcy system. This note will examine the Brit Bulk filing; the efficacy and practical purpose of Chapter 15 filing for maritime companies in New York; and re-cap the primary requirements and effects of Chapter 15.
The Brit Bulk Filing
The declaration of the Joint Administrator in support of Brit Bulk’s Chapter 15 petition asserted that Brit Bulk, a U.K. public listed company, had commenced U.K. insolvency proceedings in England as “its center of main interests” and claimed “foreign main proceeding” recognition, as discussed further below.
The declaration disclosed that Brit Bulk operated, at its peak, a fleet of approximately 50-70 vessels. Most remarkable is that in the third quarter of 2008 Brit Bulk “increased its chartered-in-capacity at a time when the demand for shipping capacity decreased significantly.” Brit Bulk’s lenders accelerated its loan obligations.
The Nub of the Filing
The declaration stated that since late September 2008 over 14 Supplemental Admiralty Rule B actions had been filed against it. All of those actions would have been filed in New York to attach wire transfers passing through intermediary clearing house banks. The largest attachment action sought to attach $39 million. The Liquidator argued that the Rule B attachments “would cause injury or detriment to the creditors as a whole and would prevent the orderly administration and integrity of [Brit Bulk’s] insolvency proceedings in England.” Brit Bulk obtained a restraining order against Rule B plaintiffs—evidently the primary purpose of the filing.
The “New Comity”—Chapter 15: “Ancillary and Other Cross-border Cases”
United States’ bankruptcy law, codified principally in the Bankruptcy Code, has recognized “ancillary petitions,” that is, permitting a representative trustee or liquidator of a foreign debtor to file a bankruptcy petition “ancillary” to the main bankruptcy case pending in another country. The sensible purpose was to allow the foreign representative to marshal all the assets of the debtor for the main, “home” bankruptcy case for equal pro rata distribution, rather than to allow U.S. creditors to obtain more than their fair share in a “piecemeal” fashion. The one major caveat was that the order of distribution or “treatment of all holders of claims” had to be broadly similar in the foreign jurisdiction as in the U.S. The new chapter takes this view of comity substantially further and may somewhat reduce the element of discretion left to the bankruptcy court to deny such petitions. However, case law relating to the old Code section remains applicable.
Conditions for Recognition
Being a Foreign “Debtor”
First there must be a “debtor,” defined as “an entity that is subject to a foreign proceeding,”3 meaning 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 of a foreign court, for the purpose of reorganization or liquidation.”4
Being a “Foreign Representative”
The issue of who is a foreign representative (which was also an issue subject to frequent challenge under the former Section), is now a streamlined enquiry and includes a “person or body appointed on an interim basis . . . ”5
The “Foreign Proceeding”
The new chapter makes two distinctions:
The foreign proceeding may be a “main” proceeding or a “non-main” proceeding. Chapter 15 defines a main proceeding as one brought in the country “where the debtor has the “center of its main interests.”
A “foreign non-main” proceeding is defined as a foreign proceeding, other than the main one, in a country where the debtor has “an establishment,” as opposed to its “main interests.”6
The new chapter provides for a case to be commenced by the filing of “a petition for recognition of a foreign proceeding.” 11 U.S.C. § 1504. This requires the foreign representative’s petition to be accompanied by inter alia, (“evidence”, in English) from the foreign court of the “existence of such foreign proceeding and of the appointment of the foreign representative.”7 After notice and a hearing, the bankruptcy court is directed to enter an order recognizing a foreign main or non-main proceeding with the specific direction that such petitions “shall be decided upon at the earliest possible time.”8
Effect of Recognition
The new chapter contains a section specifying the “[r]elief that may be granted upon the filing of a petition . . .” so that the court may provide relief prior to ruling on the application, if needed to protect the assets of the debtor or interests of creditors.9
This relief includes:
- “staying execution against the debtor’s assets”;
- “entrusting the administration or realization of all or part of the debtors assets located in the United States to the foreign representative or person authorized by the court . . .”
In the Brit Bulk case, the Bankruptcy Court entered a temporary restraining order on the day the petition was filed which it then extended prior to a hearing on whether to recognize Brit Bulk’s English administration as a “foreign main proceeding.”
In a separate section, Chapter 15 lays out the “effects of recognition” as a matter of right upon recognition of the foreign proceeding, including the application of the Bankruptcy Code’s well known “automatic stay” “with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States.”10 In addition, certain discretionary relief may be granted consistent with that regularly granted in domestic cases. Upon the request of the foreign representative, the court may entrust distribution of the debtor’s assets “located in the United States” to the foreign representative, provided that U.S. creditors’ interests are “sufficiently protected.” The foreign representative is also given the power to assert avoidance actions but the new section does not dictate the choice of law applicable to such avoidance actions.
The little heard of Chapter 15 is likely to become as familiar as the term “Rule B” in admiralty circles. It effectively shuts down Rule B and other pre-judgment and post-judgment collection efforts throughout the U.S. in one fell swoop. When the “unknown event” of a total collapse in the shipping market has just occurred at least there is a known safe harbor for an insolvent maritime company considering how to stave off its creditors.
- Jeremy J.O. Harwood, M.A. (Oxon.) See, Shipping, Finance, and Insolvencies: A Homeport in the United States?, Mainbrace, June 2007, at 3.
- As described by Nassim Taleb. in “The Black Swan.”
- 11 U.S.C. § 1502(1).
- 11 U.S.C. § 101(23).
- 11 U.S.C. § 101(24).
- 11 U.S.C. § 1502(5).
- 11 U.S.C. § 1515(b)(2).
- 11 U.S.C. § 1517(a).
- 11 U.S.C. § 1519.
- 11 U.S.C. § 1520(a)(1).