The Chapter 15 Backdoor: How Chinese Megafirms Game the US Cross-Border Bankruptcy System

Why Are Chinese Megafirms Filing for Bankruptcy in the US?

In recent years, a surprising trend has emerged: distressed Chinese conglomerates are increasingly seeking insolvency relief in US bankruptcy courts. Rather than rely on China’s domestic bankruptcy regime, corporate giants like Evergrande, Sunac, Modern Land, and Luckin Coffee have all filed for cross-border bankruptcy under Chapter 15 of the US Bankruptcy Code—the chapter governing recognition of foreign insolvency proceedings. Notably, none of those companies maintain substantial operations, assets, or commercial ties to the US.

This trend underscores a widening gap between the ideal and reality of cross-border insolvency cooperation. When Congress enacted Chapter 15 in 2005, which codified the universalist principles of the UNCITRAL Model Law on Cross Border Insolvency (1997), its aim was to mitigate collective action problems inherent in the restructuring of multinational corporations and facilitate cross-border judicial cooperation by avoiding territorial ‘ring-fencing’.

Two decades later, Chapter 15 has now evolved into a strategic backdoor for foreign debtors with minimal US ties to exploit jurisdictional gaps. Over the past five years, the US has become the top restructuring forum for China’s megafirms—all thanks to Chapter 15. Through calculated forum shopping, these companies have discharged billions of dollars in debt—often to the detriment of US creditors—while sidestepping accountability at home and abroad. In our forthcoming article, Exporting Bankruptcy: China’s Jurisdictional Gambit Under Chapter 15, we explore how Chinese debtors are using Chapter 15, why it matters, and what reforms are needed to restore its original purpose.

The Playbook of Cross-Border Regulatory Arbitrage

Chinese debtors like Evergrande have developed what we call an ‘iterative model’ of cross-border forum shopping—that is, filing sequential bankruptcies in multiple jurisdictions to exploit discrepancies in substantive insolvency law. 

Here’s how it works: A distressed Chinese debtor incorporates a shell entity in an offshore haven, typically the Cayman Islands, where creditor protections and claim priorities favor debtors. It then initiates a restructuring proceeding under Cayman law. After obtaining a reorganization plan approved by the Cayman court, the debtor petitions a US bankruptcy court to recognize and enforce that plan under Chapter 15. Once recognized, the debtor gains the sweeping protections of the US Bankruptcy Code—including the automatic stay and the discharge of third-party claims—without facing the rigorous scrutiny and substantive checks that Chapter 11 imposes on domestic debtors.

This jurisdictional arbitrage is enabled by two features of Chapter 15: 

First, its permissive venue rules. Under 28 U.S.C. § 1410, a debtor need only show that filing in a district serves ‘the interests of justice’ and ‘the convenience of the parties’. Such venue flexibility practically allows the foreign debtor to pick any district in the US to file a Chapter 15 petition.

Second, its mechanical recognition requirements. To obtain recognition, a debtor must prove: (1) that the foreign proceeding is a ‘foreign main proceeding’, meaning it occurs in the jurisdiction where the debtor has its ‘center of main interests’ (COMI), presumed to be the location of its registered office under 11 U.S.C. § 1516; and (2) that the petitioner is a duly authorized ‘foreign representative’. Once both criteria are met, recognition is nearly automatic unless the foreign proceeding violates fundamental US public policy or fairness principles—a high bar to overcome.

These features invite jurisdictional manipulation. Debtors routinely ‘manufacture’ COMI by relocating nominal business functions or incorporating shell entities in offshore havens where they conduct no meaningful operations. Courts have, at times, accepted COMI designations based on little more than mailing addresses or financial accounts. While courts have begun scrutinizing these practices, COMI can easily shift over time in a globalized economy, and multinational companies have gone further to engineer that shift in anticipation of insolvency, expanding their jurisdictional options.

China’s Jurisdictional Gambit Under Chapter 15

Chinese debtors are not alone in exploiting Chapter 15’s structural gaps. Consider In re Mega NewCo Limited, where a Mexican debtor incorporated a shell entity in England solely to restructure under English law. The English court approved a reorganization plan that included nonconsensual third-party releases—a remedy unavailable under Mexican law and prohibited by the US Supreme Court in its recent ruling in Purdue Pharma. Nonetheless, the debtor secured Chapter 15 recognition in the Southern District of New York. The court was bound to enforce the English plan under Chapter 15 because the formal statutory criteria were met.

What sets Chinese debtors apart is their scale, sophistication, and structural incentives. A typical Chinese debtor divides its obligations into two structurally distinct silos: offshore (governed by Hong Kong or New York law, often unsecured) and onshore (governed by Chinese law, secured by mainland assets), with onshore entities being the shareholders of offshore subsidiaries. Offshore liabilities are usually far larger than offshore assets, leaving offshore creditors with minimal recourse in an event of default. As a result, offshore creditors are structurally subordinated to onshore creditors. This undermines a basic tenet of bankruptcy law: equal treatment of similarly situated creditors.

This structural split reflects a deliberate strategy to evade the constraints of China’s domestic bankruptcy regime. China’s Enterprise Bankruptcy Law (EBL) is notoriously opaque, prone to political intervention, and hostile to foreign capital. Fewer than 10% of EBL cases result in successful reorganization; over 77% end in liquidation. By comparison, in the US, only about 5% of distressed companies liquidate. Coupled with strict foreign investment controls, Chinese companies are driven to raise capital offshore, making them heavily exposed to foreign debt.

US bankruptcy courts have begun to take note of this trend. Faced with a surge of Chinese Chapter 15 filings, courts are reassessing the limits of recognition by reviving dormant doctrines and crafting new guardrails against abuse through innovative statutory interpretation. Three cases—In re Modern Land, In re Sunac, and In re Suntech Power—illustrate this tension. While the debtors’ real assets and operations remained anchored in mainland China,each sought recognition of a Cayman restructuring scheme in the Southern District of New York. Yet, the same court ruled differently—signaling a growing judicial ambivalence. Despite judicial attempts to police the boundaries of Chapter 15 access, such judicial improvisation has produced inconsistent rulings and introduced new doctrinal fault lines. 

Why Does It Matter? Implications for US Bankruptcy Venue Reform

These developments challenge the dominant policy discourse on bankruptcy venue reform. In the US, legislative efforts remain narrowly fixated on domestic forum shopping under Chapter 11. Proposals like the Bankruptcy Venue Reform Act—which would limit Chapter 11 filings to jurisdictions tied to a debtor’s principal place of business or assets—have garnered bipartisan support. Yet, such proposals ignore the growing reality that multinational firms can easily sidestep venue restrictions through iterative forum shopping. Ironically, under the proposed act, US-based debtors would face tightened venue constraints under Chapter 11, while foreign debtors would remain free to manufacture US venue through Chapter 15.

This asymmetry disadvantages US debtors and erodes the predictability of cross-border bankruptcies. So long as substantive differences persist between US and foreign insolvency regimes—and they invariably will—sophisticated debtors will always find ways to exploit those gaps. As Chinese filings demonstrate, restricting domestic venue flexibility without addressing cross-border access through Chapter 15 may simply exacerbate transnational forum shopping, intensifying the very injustices that venue reform is meant to address.

The authors’ forthcoming paper can be found here. 

Jason Jia-Xi Wu is a New York-licensed attorney and a JD from Harvard Law School.

Chentuo Zhu is a JD Candidate at William & Mary Law School and a Chartered Financial Analyst (CFA).