Financial uncertainty has spread across the globe. The U.S. disrupted international commerce by repeatedly threatening to impose sweeping tariffs on dozens of countries, including some of the nation’s closest trading partners and allies. In response, some nations announced their own burdensome tariffs on American goods. Although many of the U.S. tariffs have been paused, uncertainty in the global markets remains. In fact, on June 10, the World Bank issued its twice-yearly Global Economic Prospects Report and decreased its global growth forecast to 2.3%.[1]
A weakened global economy may lead to an increase in corporate insolvencies. Many of these companies may be operating in multiple jurisdictions around the world. When an international or multi-national company faces financial headwinds, the question is not just whether to commence insolvency proceedings, but also where to commence those proceedings.
There are aspects of the American bankruptcy system, and particularly chapter 11, that potential debtor entities find appealing. For example, in the U.S., debtors immediately obtain the protections of the automatic stay and can obtain postpetition (or “DIP”) financing. In addition, a chapter 11 debtor’s prepetition management continues to operate and control the business throughout the proceeding.
It is also surprisingly easy for a foreign entity to qualify as a debtor under chapter 11. Section 109 of the Bankruptcy Code defines which entities may be a debtor in chapter 11 and provides that “only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title."[2]
The property requirements of section 109 are minimal. For example, a bank account or a retainer paid to a professional can be sufficient.[3] An entity considering filing bankruptcy in the U.S. can provide its restructuring counsel with a retainer and not only pay its counsel but also create the necessary jurisdictional hook. As a result, a company can have minimal ties to the U.S. and still qualify for relief under chapter 11.
If economic challenges cause companies to commence insolvency proceedings, even foreign companies may choose to file in the U.S. rather than their home jurisdictions. We saw this phenomenon during the global economic downturn caused by the pandemic, which resulted in the chapter 11 filings of major foreign companies, including three foreign airlines—LATAM Airlines, Aeromexico, and Avianca Airlines.
But sometimes filing in the U.S. is not preferable. For example, in England, the Gibbs rule requires debt governed by English law to be discharged under English law, so a non-English court cannot restructure those debts. An entity with English-governed debt will have to file in England unless all creditors consent to the restructuring.
However, an entity may commence insolvency proceedings abroad and still obtain protections from a U.S. bankruptcy court. In 1997, the United Nations Commission on Internal Trade Law adopted the Model Law on Cross-Border Insolvency to assist states in developing insolvency laws that could effectively address cross-border insolvency proceedings. It focuses on facilitating cooperation and coordination between jurisdictions and has been adopted in over 60 jurisdictions worldwide.
In the U.S., the Model Law was enacted through chapter 15.[4] Under this chapter of the Bankruptcy Code, an entity’s foreign representative will seek recognition of the company’s foreign insolvency as either a main or nonmain proceeding. A main proceeding is a proceeding commenced in the jurisdiction where the entity has its center of main interests. An entity’s “center of main interests” is where the debtor conducts its main operations, business administration, and other economic activities on a day-to-day basis. A nonmain proceeding is a proceeding commenced where the debtor has consistent economic activity (an “establishment”) but not its center of main interests.
Unlike chapter 11, when an entity commences a case under chapter 15, the automatic stay will not immediately go into effect. However, entities that obtain recognition of a foreign insolvency as a foreign main proceeding will be protected by the automatic stay immediately upon recognition. Entities that obtain recognition of the foreign insolvency as a nonmain proceeding can ask the court to provide those protections separately. Regardless of whether recognition is granted as a main or nonmain proceeding, after recognition the entity may also seek discovery in the U.S., recognition of a plan confirmed abroad, and other appropriate relief.
For all of these reasons, the U.S. bankruptcy system is welcoming to foreign and international entities. Therefore, if the current economic outlook is accurate, restructuring professionals in the U.S. may see an increase in domestic entities seeking U.S. bankruptcy court protection, as well as an increase in foreign and international companies seeking that protection.
[1] https://openknowledge.worldbank.org/server/api/core/bitstreams/2baabfb0-d076-444b-9564-7935afab5ada/content
[2] 11 U.S.C. § 109(a) (emphasis added).
[3] In re Axona Int’l. Credit & Commerce Ltd., 88 B.R. 597 (Bankr. S.D.N.Y. 1988), aff ’d 115 B.R. 442 (S.D.N.Y.1990) (“The Debtor's bank accounts in this country constitute that jurisdictional predicate for the commencement of this Case.”); In re JPA No. 111 Co. Ltd., 2022 WL 298428 (Bankr. S.D.N.Y. Feb. 1, 2022) (holding that the debtors meet the requirements of section 109 on the basis of $250,000 in retainer accounts established by U.S. counsel for the purpose of funding legal services in connection with the bankruptcy).
[4] Circuits are split on whether section 109’s requirements apply to debtors in chapter 15. See In re Al Zawawi, 97 F.4th 1244 (11th Cir. 2024) (finding section 109’s requirements do not apply to chapter 15 debtors); Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013) (finding that section 109 does apply to chapter 15 debtors).
