Directors of US Company in Chapter 11 Granted Relief by English Court under Cross-Border Insolvency Regulations 2006

This post comes to us from Squire Patton Boggs. It has been authored by Helen F. Kavanagh. This post was also published here. 

The English Court has recently considered who can be recognised as ‘foreign representatives’ under the Cross-Border Insolvency Regulations 2006 (CBIR) in the case of Re 19 Entertainment Limited (2016), about a US company in Chapter 11. The Re 19 Entertainment Limited judgment appears to be the first English case where directors of a company in Chapter 11 proceedings were recognised as ‘foreign representatives’.

Under the CBIR, an English court can give effect, in its jurisdiction, to a foreign law/court order or the legal status of a foreign representative. If a person is deemed a ‘foreign representative’, they are entitled to commence and participate in proceedings under the insolvency laws of the enacting state.  This means the proceedings will be supervised and controlled by the foreign court.

Chapter 11 proceedings involve reorganisation of companies or liquidation (only if the rescue of the company cannot be achieved) under US bankruptcy law. Once these proceedings have begun, the debtor is given an exclusive 120 day period in which to provide the court with a reorganisation plan. The system under US law is broadly similar to that of administration in England, but in the US Chapter 11 proceedings tend to be ‘debtor in possession’ which means the company’s directors retain control over the management of the company.

The applicants in this case were directors of 19 Entertainment Limited which is part of a group of companies who specialise in owning, producing and developing entertainment content. The applicants applied for recognition of the Chapter 11 proceedings by the English court and for discretionary relief in the UK.

The judge first considered the location of the company's centre of main interest (COMI). The address of the company’s registered office was in London which gave rise to a rebuttable presumption that the COMI was in London. In considering the presumption, the judge considered a number of factors including the fact that the London office had been shut down, all business activities took place in the US, the directors are US citizens and creditors gave evidence that they believed the COMI to be in Los Angeles.  The presumption was rebutted and the COMI was instead held to be in the US.

The main issue in the case was the granting of relief and the form that this relief would take.  In order to grant relief, the Chapter 11 proceedings had to amount to ‘foreign main proceedings’.  These are proceedings in a foreign state pursuant to a law relating to insolvency which are controlled or supervised by a foreign court for the purpose of reorganisation or liquidation. The outcome of the case was that the application was granted to recognise the Chapter 11 proceedings.

The court also had to decide whether the applicants (ie the directors of the company) were ‘foreign representatives.’ A foreign representative is deemed to be a person authorised in foreign proceedings to administer the reorganisation/liquidation of the company or to act as a representative of the foreign proceedings.  In US proceedings, the continuation of a debtor in possession to operate and manage the business during the bankruptcy proceeding under Chapter 11 is the norm. Therefore the court accepted that the directors were indeed foreign representatives.

Art 21(g) CBIR enables the court to grant any additional relief which may be available to an English insolvency office-holder under English law. In this case, relief was granted in the form of a moratorium similar to that provided in para 43 of sch. B1 of the Insolvency Act 1986. The moratorium prevents a winding up petition or other creditor action whilst steps are taken to put the company into administration.