Current Issues and Developments in Cross-Border Insolvencies

Prior to its repeal with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act, §304 provided authority for adjudicating international insolvency issues before the U.S. Bankruptcy courts where a proceeding had already been filed or would be more appropriately filed in a foreign jurisdiction. The purpose of this section was to shield American creditors and assets located within the Unites States from piecemeal distribution of assets resulting from foreign reorganization or liquidation procedures. Section 304 acted as a jurisdictional aid to foreign bankruptcy representatives by providing for discovery and a structured distribution of assets.

Pursuant to subsection (a), only a “foreign representative” could commence a case “ancillary” to a foreign proceeding. Ancillary proceedings were conducted as adversary proceedings and did not result in a conventional reorganization or liquidation, did not create a bankruptcy estate and did not result in the appointment of a U.S. Trustee. While many of the powers granted trustees and debtors in possession under the Bankruptcy Code were not available to foreign representatives in the context of section 304 ancillary proceedings, many courts interpreted subsection (b) of section 304 to provide a basis for granting relief similar to the relief available to trustees, such as authorizing asset dispositions consistent with section 363, issuing injunctions to the same effect as the automatic stay, and permitting the pursuit of avoidance type actions not based on the bankruptcy code but on choice of law rules. Subsection (c) qualified the expansive powers of subsection (b) by enumerating factors to be weighed when fashioning judicial relief such as ordering the turnover of property, enjoining the disposition or transfer or property or authorizing the taking of discovery. Specifically, subsection (c) provided:

In determining whether to grant relief under subsection (b) of this section, the court shall be guided by what will best assure an economical and expeditious administration of such estate, consistent with –

(1) just treatment of all holders of claims against or interests in such estate

(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding

(3) prevention of preferential or fraudulent dispositions of property of such estate

(4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title

(5) comity

(6) If appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceedings concerns.

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