When an arrangement proceeding abroad converts to liquidation, there is no reason to close the original chapter 15 case and start anew with another chapter 15 filing, for reasons explained by Bankruptcy Judge James L. Garrity, Jr. of New York.
The finances of a South African airline had been deteriorating even before the pandemic. Eventually, the airline was forced to ground all aircraft.
Under the aegis of joint business rescue practitioners, or BRPs, the airline commenced business rescue proceedings in South Africa in May 2020 under Chapter 6 of the South African Companies Act of 2008. Four months later, creditors approved a business rescue plan, akin to a chapter 11 plan of reorganization.
Next, the BRPs filed a chapter 15 petition in New York. In April 2021, Judge Garrity granted foreign main recognition to the proceedings in South Africa. In November 2021, he authorized the BRPs to take discovery from an aircraft manufacturer. In re Comair Ltd., 21-1298, 2021 BL 436434, 2021 Bankr Lexis 3137 (Bankr. S.D.N.Y. Nov. 14, 2021). To read ABI’s report, click here.
When the BRPs decided there was no hope of reorganization, the South African court terminated the rescue proceedings, commenced a provisional liquidation in June 2022 and appointed joint provisional liquidators, or JPLs, to take over from the BRPs.
The next month, the JPLs filed a motion asking Judge Garrity to modify the 2021 recognition order by recognizing the liquidation proceedings in South Africa as the foreign main proceeding. The JPLs also asked Judge Garrity to substitute the JPLs for the BRPs in all pending matters in the chapter 15 case.
The aircraft manufacturer opposed. The manufacturer argued that the BRPs must first file a final report and then formally close the chapter 15 case. To the manufacturer’s way of thinking, the JPLs then could file a new chapter 15 case and once again go through the process of obtaining foreign main recognition.
And by the way, the manufacturer contended that the JPLs could not take discovery under the discovery order obtained by the BRPs. The manufacturer said there should be no discovery unless and until the JPLs were to obtain a new discovery order from Judge Garrity.
Judge Garrity sided with the JPLs on February 12. Should there be an appeal, a district judge likely would never before have confronted chapter 15. Laudably, Judge Garrity’s 45-page opinion tells the district judge everything there is to know about every possibly related issue.
Start Anew, or Modify the Recognition Order?
Several sections of the Bankruptcy Code informed Judge Garrity’s decision on whether he could simply modify the original recognition order or require the JPLs to start again from the beginning. Section 1517(d) says that the provisions of chapter 15
do not prevent modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist, but in considering such action the court shall give due weight to possible prejudice to parties that have relied upon the order granting recognition.
Federal Rule 25(c), made applicable by Bankruptcy Rules 7025 and 9014(c), reads as follows:
If an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party.
The manufacturer contended that the business rescue had been discontinued and that the provisional liquidation was a new proceeding under a new case number, although in the same court in South Africa.
Judge Garrity began by noting that relief under Section 1517(d) is discretionary. Moreover, he said that it limits the exercise of discretion to cases where “(1) the basis for recognition was flawed in some way, or (2) where the grounds for recognition have ceased to exist.”
The JPLs said that the South African proceeding was continuing uninterrupted and had only been converted from a rescue to an insolvency. Judge Garrity agreed. He said there was “only a semantic difference between (i) the ‘termination’ of a reorganization in favor of a liquidation, and (ii) the ‘conversion’ of a reorganization into a liquidation.”
For Judge Garrity, the “relevant issue” was whether the liquidation in South Africa was the “same” foreign proceeding that he had already recognized.
To belay doubt about the ability to modify the original recognition order, Judge Garrity alluded to Section 1522(c), which says that the “court may, at the request of the foreign representative or an entity affected by relief granted under section 1519 or 1521, or at its own motion, modify or terminate such relief.”
Judge Garrity sided with the JPLs in saying that the “deliberately flexible nature of chapter 15 is designed to accommodate exactly this kind of minor administrative difference among international insolvency proceedings.” He therefore held that he could modify the original recognition order because “the South African business rescue proceeding and the liquidation are parts of one foreign proceeding.”
Before granting the motion, Judge Garrity made a “fresh analysis” of the provisional liquidation to “ensure that it complies with chapter 15 in its current state.”
Once again reviewing the requisites for foreign main recognition and finding compliance, Judge Garrity granted the motion to amend the original recognition order by recognizing the provisional liquidation as a foreign main proceeding. He also substituted the JPLs for the BRPs in all contested matters, including the discovery dispute with the manufacturer.
When an arrangement proceeding abroad converts to liquidation, there is no reason to close the original chapter 15 case and start anew with another chapter 15 filing, for reasons explained by Bankruptcy Judge James L. Garrity, Jr. of New York.
The finances of a South African airline had been deteriorating even before the pandemic. Eventually, the airline was forced to ground all aircraft.
Under the aegis of joint business rescue practitioners, or BRPs, the airline commenced business rescue proceedings in South Africa in May 2020 under Chapter 6 of the South African Companies Act of 2008. Four months later, creditors approved a business rescue plan, akin to a chapter 11 plan of reorganization.
Next, the BRPs filed a chapter 15 petition in New York. In April 2021, Judge Garrity granted foreign main recognition to the proceedings in South Africa. In November 2021, he authorized the BRPs to take discovery from an aircraft manufacturer.