The U.S. bankruptcy court in New York recently issued an important decision under Chapter 15 of the U.S. Bankruptcy Code concerning the restructuring of U.S. law governed debt in a foreign insolvency proceeding. In re Mega Newco Limited, Case No. 24-12031 (MEW) (Bankr. S.D.N.Y. Feb. 24, 2025).
Chapter 15 allows recognition of a foreign proceeding as either a “foreign main proceeding” or a “foreign nonmain proceeding.” 11 U.S.C. § 1517. For the debtor to obtain recognition of a foreign proceeding as a foreign main proceeding, the foreign proceeding must be pending in the country where the debtor has the “center of its main interests” (abbreviated “COMI”). What it means for a debtor to have its COMI in a particular place has generated a substantial body of law. The Mega Newco Limited decision considers the COMI issue in the context of a subsidiary created to restructure debts held by its parent.
Operadora de Servicios Mega, S.A. De C.V., Sofom, E.R. (“Parent”) is a Mexican financial services company that issued certain notes pursuant to an indenture governed by New York law (the “U.S. Notes”). Parent faced liquidity constraints and negotiated an agreement to restructure the U.S. Notes with a group of noteholders that represented more than 25% of the outstanding notes. However, under U.S. law, Parent could not implement this restructuring outside of bankruptcy without obtaining the affirmative consent of 100% of the noteholders, which was impractical. While Parent could restructure the notes within bankruptcy, doing so under chapter 11 (or under similar laws in other jurisdictions) would not allow Parent to restructure the U.S. Notes alone. U.K. law, however, permits a consensual arrangement to restructure a single set of note obligations. To do so, Parent set up a subsidiary, Mega Newco Limited (“Mega Newco”), which was incorporated under the laws of England and Wales and listed its registered office in London. Parent itself had no registered office or substantial business operations in the U.K.
Holders of more than 75% of the U.S. Notes approved Mega Newco’s proposed scheme of arrangement to restructure the U.S. Notes obligations (the “Scheme of Arrangement”). No objection was filed. Mega Newco then filed a chapter 15 petition in the U.S. to seek recognition of the U.K. proceeding and enforce the English court order approving the Scheme of Arrangement. No party objected to the chapter 15 petition.
The court considered whether Mega Newco’s petition met the criteria for recognition of a foreign proceeding. At the outset, the court held that the U.K. proceeding was not a foreign nonmain proceeding. Recognition as a foreign nonmain proceeding requires that the debtor has an “establishment,” meaning “any place of operations where the debtor carries out a nontransitory economic activity,” in the country where the proceeding is pending. Here, the court held, Mega Newco did not have an “establishment” in the U.K. because it had never engaged in any business activities. Mega Newco had only engaged in restructuring activities, which are insufficient to meet the threshold of an “establishment,” because a debtor will always have engaged in restructuring activities in the place where the debtor seeks relief.
Next, the court considered whether the U.K. proceeding was a foreign main proceeding, which turns on the location of the debtor’s COMI. The Bankruptcy Code establishes a presumption, “[i]n the absence of evidence to the contrary,” that a debtor’s COMI is where its registered office is. 11 U.S.C. § 1516(c). Here, the court held, there was no contrary evidence—the only activities Mega Newco had ever engaged in were the restructuring activities in the U.K.
The court nonetheless expressed concern. The court noted that chapter 15 is premised on the idea that a debtor seeking to restructure an obligation seeks relief in a foreign proceeding located in the place where the debtor has its COMI. Here, Parent, whose COMI is in Mexico, sought to restructure the U.S. Notes, but in a U.K. proceeding to which Parent was not a party. The court observed that if this structure were routinely allowed, the statutory predicates of chapter 15 relief could become meaningless. Any debtor could create a subsidiary in a jurisdiction it considers favorable, have the subsidiary assume the parent’s obligations, and restructure the obligations in the subsidiary’s jurisdiction. The court noted longstanding concerns among courts and commentators about manipulation of a debtor’s COMI.
Accordingly, the court asked whether the underlying structure in the case was an improper manipulation of COMI. The court held that, in the circumstances of the case, it was not, because the rights of creditors were not frustrated or thwarted. Instead, the Scheme of Arrangement would benefit all parties’ recoveries and maximize the value of the underlying businesses. The court particularly highlighted that there were no objections to recognition of the U.K. proceeding or the enforcement of the U.K. order. Given the absence of objection and the support of the noteholders, the court granted recognition of the U.K. proceeding and enforcement of the U.K. court’s order.
