What Is Chapter 15 Bankruptcy?
Chapter 15 is a section in the U.S. Bankruptcy Code that was added in 2005 to provide for cooperation between U.S. courts and foreign courts when foreign bankruptcy proceedings touch upon U.S. financial interests.
The section was added in response to a United Nations recommendation for cooperation among nations on what it calls "cross-border insolvency."
- Chapter 15 bankruptcy fosters cooperation among U.S. courts, appointed representatives, and foreign courts in bankruptcy cases filed outside the U.S.
- The U.S. is among 48 nations that adopted similar measures based on a United Nations commission's recommendation on international bankruptcy cases.
- Chapter 15 is intended to reduce the risk for creditors and stakeholders of foreign companies.
Understanding Chapter 15 Bankruptcy
The primary goal of Chapter 15 bankruptcy is to promote cooperation among U.S. courts, their appointed representatives, and foreign courts and to make legal proceedings of international bankruptcies more predictable and fair for debtors and creditors.
As such, Chapter 15 focuses on jurisdiction. It also tries to protect the value of the debtor’s assets and, when possible, financially rescue an insolvent business.
Chapter 15 allows a representative in a corporate bankruptcy case that has been filed outside the United States (also known as a “cross-border insolvency”) to obtain access to the U.S. court system. This is intended to provide an efficient and common-sense mechanism for addressing insolvencies that involve debtors, creditors, and assets associated with more than one country. The purpose of Chapter 15 is outlined in the following objectives listed in Title 11, Chapter 15, Section 1501 of the U.S. Code:
- Promoting cooperation among U.S. courts and parties of interest and the courts of other countries involved in cross-border insolvencies
- Establishing a better legal foundation for cross-border investment and trade
- Providing for better administration of cross-border insolvencies that protects the interests of all parties
- Protecting the value of the debtor’s assets
- Assisting financially troubled companies
The number of countries that have adopted their own form of Chapter 15, based on the United Nations Commission on International Trade Law’s “Model Law on International Commercial Arbitration.”
The Purpose of Chapter 15
The purpose of Chapter 15, and the Model Law on which it is based, is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country.
This general purpose is realized through five objectives specified in the statute:
(1) to promote cooperation between the United States courts and parties of interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases;
(2) to establish greater legal certainty for trade and investment;
(3) to provide for the fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor;
(4) to afford protection and maximization of the value of the debtor's assets; and
(5) to facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
Chapter 15 operates as the principal door of a foreign representative to the federal and state courts of the United States. Once recognized, a foreign representative may seek additional relief from the bankruptcy court or from other state and federal courts and is authorized to bring a full (as opposed to ancillary) bankruptcy case.
Chapter 15 also gives foreign creditors the right to participate in U.S. bankruptcy cases and it prohibits discrimination against foreign creditors (except certain foreign government and tax claims, which may be governed by treaty).
Chapter 15 History
Chapter 15 was added to federal law as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It was based on the United Nations Commission on International Trade Law’s “Model Law on Cross-Border Insolvency.”
A total of 48 countries, including Japan, Canada, China, Australia, the United Kingdom, Russia, Germany, Saudi Arabia, and Mexico, have adopted this law to reduce the risk for creditors and stakeholders of international companies.
Formally referred to as “Chapter 15, Title 11 of the United States Code,” Chapter 15 has its origins in Section 304 of the U.S. Bankruptcy Code, which was enacted in 1978. Given the increasing frequency of bankruptcies involving more than one jurisdiction, Section 304 was repealed in 2005 and replaced with Chapter 15, which carries the title of “Ancillary and Other Cross Border Cases.”
The Old Chapter 15
From 1978 to 1986, Chapter 15 had a different purpose as it relates to the Bankruptcy Code. During that time, Chapter 15 related to the United States Trustee Program, a U.S. Department of Justice program that oversees the administration of bankruptcy cases and the private trustees that participate in them.
Chapter 15 in this context worked as a trial in certain judicial districts to afford the trustees' powers once reserved for bankruptcy judges. The changes were adopted and folded into the Bankruptcy Code.