US Appeal Court Provides Long-Awaited Certainty On Chapter 15 Relief

In recent years there have been conflicting rulings by US courts on the question of the time at which the centre of main interests (COMI) of non-US debtors should be determined. This has cut against one of the primary goals of Chapter 15 of the Bankruptcy Code, namely provision of legal certainty in the US assistance of administration of cross-border insolvencies.

The ruling of the second US Circuit Court of Appeals (the Court) in the case of In the Matter of Fairfield Sentry Limited, Morning Mist Holdings Limited v. Kenneth Krys on 16 April 2013 (Fairfield) has resolved one particular uncertainty while retaining a versatile and open-ended approach to assessment of the criteria which govern Chapter 15 relief. This will be of particular importance to liquidators of offshore investment funds.

Chapter 15, in part, provides an automatic stay of US proceedings against a company (or individual) when Chapter 15 relief is granted to a liquidator (or a trustee in bankruptcy, if the debtor is an individual) who is appointed in foreign main proceedings. Such a stay is of particular importance to non-US debtors susceptible to US proceedings. Whether the non-US insolvency proceedings qualify as foreign main proceedings is determined by reference to whether those proceedings were initiated in the jurisdiction in which the debtor has its COMI. If it is found that the insolvency proceedings have been commenced in a "foreign non-main jurisdiction" (i.e. not where the debtor's COMI is located) then recognition is not automatic and a stay may only be granted at the Court's discretion.

US judges in various cases have been presented with arguments that COMI should be determined (a) through reference to the entire operational history of the debtor (which can be decades of business activity); (b) at the date of the commencement of the foreign insolvency proceeding; or (c) at the date of presentation of the petition for Chapter 15 relief. In Fairfield, the appellant shareholder (Morning Mist Limited) submitted, in aid of an argument that the COMI of the company was in New York, that it was necessary to take into account the operational history of the debtor in order to determine Fairfield's COMI. The Court rejected the shareholder's submission and also rejected the proposition (which found support in the case of Millennium Global Emerging Credit Master Fund, a decision of Judge Gropper in 2011) that the date at which the assessment of factors relevant to determine...