When no affected creditors objected, a decision from the bankruptcy court in New York could be read to mean that foreign main recognition in a chapter 15 case will be granted even if the foreign proceeding was pending in a country where the debtor arguably did not have its center of main interests.

The parent was a Mexican financial services company headquartered in Guadalajara. The parent had issued notes in 2020 under an indenture governed by New York law.

The parent negotiated a restructuring with holders of 25% of the U.S. notes. The deal left all creditors of the parent unaffected aside from holders of the U.S. notes. The holders were to receive either partial cash payments or new equity, plus the option to purchase new notes issued by the parent.

Creating a U.K. Subsidiary

In his February 24 opinion, Bankruptcy Judge Michael E. Wiles explained how the parent and the holders faced a problem in effectuating the deal. Among the available jurisdictions, he said that “most of those laws would not have permitted a surgical restructuring of just the U.S. Notes.” However, he said,

U.K. laws permit the approval of a consensual scheme of arrangement that deals with a single set of note obligations, and pursuing such a scheme of arrangement in the English Court also promised to be less expensive and time-consuming than other alternatives.

However, the parent had no connections with the U.K., a requirement for approval of a U.K. scheme of arrangement. To avail itself of U.K. law, the parent incorporated a subsidiary in the U.K. with a registered office in London. Destined to become the debtor, the subsidiary made itself an additional obligor on the U.S. notes, with the right to contribution from the parent for payments on the U.S. notes.

With appearances by 75% of the holders in the U.K court, the subsidiary proposed a scheme of arrangement that was approved without objection and with unanimous support by voting noteholders.

The subsidiary filed a chapter 15 petition in New York seeking foreign main recognition and enforcement of the scheme of arrangement in the U.S. No noteholders objected to recognition, but Judge Wiles was concerned that if he “were routinely to allow this structure in all cases, no matter what the circumstances, the ordinary predicates for Chapter 15 relief could be stripped of meaning.”

Two Versions of Foreign Recognition

There are two forms of recognition under chapter 15, foreign nonmain recognition and foreign main recognition.

For foreign nonmain recognition, Judge Wiles said that Sections 1517(b)(2) and 1502 require “an ‘establishment’ [that] must be an actual place from which economic market-facing activities are regularly conducted,” but the subsidiary had “never engaged in any business” in the U.K., and “restructuring activities . . . are not themselves sufficient to show the existence of an ‘establishment’ in the U.K.”

For foreign main recognition, Judge Wiles said that the foreign proceeding must have “tak[en] place in the jurisdiction where the debtor has its center of main interests, or COMI,” under Sections 1502(4) and 1517(b)(1).

With regard to the subsidiary, Judge Wiles observed that its registered office was in London and that there was “no ‘contrary evidence’ in the record before me that indicates that [the subsidiary’s] own COMI is located outside the United Kingdom.” He said that the “restructuring activities apparently are the only activities in which [the subsidiary] has ever engaged” and “may be considered in determining whether its COMI is in the U.K.”

Still, Judge Wiles saw “significant risks in the structure that has been used here” because “the whole structure admittedly was created for the purpose of restructuring the U.S. Notes issued by the Parent.”

Were he to grant foreign main recognition regardless of the circumstances, Judge Wiles said that a company “could restructure its obligations anywhere it chose without even subjecting itself to a foreign proceeding” simply by forming “a new subsidiary in a jurisdiction of its choice and then cause that new subsidiary to assume the parent company’s obligations.” In those circumstances, the “parent company’s COMI would no longer be relevant to the parent’s restructuring of its debts.”

In the case before him, Judge Wiles saw no “frustration or thwarting of creditor rights.” Indeed, he said that the proceedings were pursued “for laudable objectives” and enforcement of the U.K. scheme would be “fully consistent with the stated purposes of Chapter 15. See 11 U.S.C. § 1501(a).”

In cases of the sort, Judge Wiles said that “one of the main factors I ought to consider . . . is whether the affected creditors have asserted any objection.” There having been no objections, it “would be absurd for me to thwart the creditors’ constructive desires and expectations in the guise of supposedly protecting them.”

Judge Wiles granted foreign main recognition and enforced the scheme in the U.S., in view of the “overwhelming consent to the English Scheme Proceeding and the approval of the Scheme of Arrangement.” He saw “no cause . . . to look past the form of the transactions or to pursue theoretical issues that no affected party wishes to pursue.”