Court Analysis of the Public that a proceeding is collective if it - - PDF document

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SLIDE 1 44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org

JOURNAL

A M E R I C A N B A N K R U P T C Y I N S T I T U T E

The Essential Resource for Today’s Busy Insolvency Professional

Contributing Editor: Richard฀J.฀Corbi Proskauer;฀New฀York rcorbi@proskauer.com

n re ABC Learning Centres Ltd.1 recently held that the debtors’ Australian liquidation proceedings are foreign main proceedings pursuant to §§ 1502(4), 1515 and 1517(b)(1) of the Bankruptcy Code and not manifestly contrary to U.S. public policy.2

Proceedings in Australia

On Nov. 6, 2008, the boards of directors of ABC Learning Centres Ltd. and its subsidiaries resolved that the companies were becoming insolvent and entered the voluntary administration proceedings pursuant to the Australia’s Corporations Act of 2001 (Cth) (the “Corporations Act”),3 which requires that companies in the voluntary proceedings conduct two creditors’ meetings.4 The first meeting is to determine whether a creditors’ committee should be formed, and whether to remove the administrators appointed by the board of directors and appoint alternate administrators.5 The first meeting was held on Nov. 18, 2008, where a creditors’ committee was formed and the administrators remained in place.6 The second meeting was held

n June 2, 2010, where the creditors

resolved to wind up the company.7 At the second meeting, the creditors cre- ated a “committee of inspection” made up of nine members representing the cross-section of creditors, including general unsecured creditors, bondholders, employees and the banks.8 Because the debtors commenced voluntary administration proceedings, they breached the terms of the loans with their lenders.9 As a result, the lenders commenced receivership proceedings under the loans and Corporations Act.10 Such receivership proceedings are proceeding concurrently with the liquidation proceedings.

The RCS Litigation

In June 2008, an affiliate of ABC Learning, ABC Delaware, entered into a contract with RCS Capital Development LLC to develop child- care centers in the U.S.11 RCS eventu- ally brought suit against ABC Learning and ABC Delaware in Arizona state court for breach of contract, among

ther claims, and was awarded a $47

million judgment by a jury.12 In March 2009, debtor ABC Learning Centres Ltd., n/k/a ZYX Learning Centres Ltd. (“ABC Learning”) and nondebtor ABC Delaware filed a lawsuit against RCS in Nevada state court asserting several causes of action, including breach of contract, breach of constructive trust, fraudulent transfer and unjust enrich- ment.13 In connection with its defense

f this new lawsuit, RCS sought, and

was granted, relief from the automatic stay to assert its $47 million favorable verdict as a setoff in the Nevada litigation.14 This article does not focus on the relief from stay that RCS was granted in the case, but rather the public policy exception to chapter 15 recognition.

The Chapter 15 Filing

On May 26, 2010, ABC Learning Centres and its wholly owned subsid- iary A.B.C. USA Holdings Pty. Ltd. (“ABC Holdings” and collectively, the “debtors”) filed petitions in the Delaware bankruptcy court seeking recognition as foreign main proceedings pursuant to §§ 1515 and 1517 of the Bankruptcy Code of the voluntary administration proceedings (later converted to liquidation proceedings) pending in Australia.15 RCS objected to the chapter 15 peti- tion on the grounds that the liquidation proceedings are not “foreign proceedings” recognizable pursuant to chapter 15 because they do not meet the thresh-

ld requirements laid out in § 101(23) of

the Code.16 RCS argued that the liquidation proceedings were not collective in nature and not supervised by a foreign court.17 RCS also argued that the bankruptcy court should deny recognition on the grounds that the liquidation proceedings violated U.S. public policy provisions set forth in § 1506 of the Code.18

Court Analysis

f “Foreign Proceedings”

The U.S. Bankruptcy Court for the District of Delaware first addressed the issue of whether the liquidation proceedings were “foreign proceedings” as defined by § 101(23)19 as seven sub- parts: “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are sub-

Chapter 15 Applies to Australian Liquidation

About the Author

Richard฀Corbi฀is฀an฀associate฀in฀the฀ Bankruptcy฀and฀Restructuring฀Group฀in฀ Proskauer’s฀New฀York฀offjce.

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1 --B.R.--, 2010 WL 5439808 (Bankr. D. Del. Dec. 16, 2010). 2 ABC, 2010 WL 5439808 at *2. 3 ABC, 2010 WL 5439808 at *3. 4 ABC, 2010 WL 5439808 at *3. 5 ABC, 2010 WL 5439808 at *3. 6 ABC, 2010 WL 5439808 at *3. 7 ABC, 2010 WL 5439808 at *3. 8 ABC, 2010 WL 5439808 at *3. 9 ABC, 2010 WL 5439808 at *3. 10 ABC, 2010 WL 5439808 at *3. 11 ABC, 2010 WL 5439808 at *4. 12 ABC, 2010 WL 5439808 at *4. 13 ABC, 2010 WL 5439808 at *4. 14 ABC, 2010 WL 5439808 at *4. 15 ABC, 2010 WL 5439808 at *1. 16 ABC, 2010 WL 5439808 at *1. 17 ABC, 2010 WL 5439808 at *1. 18 ABC, 2010 WL 5439808 at *1. 19 ABC, 2010 WL 5439808 at *4.

SLIDE 2 44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org ject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.”20 The bankruptcy court proceeded to analyze each of the seven elements of § 101(23). First, it explained that a “proceeding” comprises “acts and for- malities set down in law so that courts, merchants and creditors can know them in advance, and apply them evenly... In the context of corporate insolven- cies, the hallmark of a ‘proceeding’ is a statutory framework that contracts a company’s actions and that regulates the final distributions of a company’s assets.”21 The court explained that the liquidation proceeding constituted a “proceeding” because the Corporations Act provided the statutory framework for the mechanism to commence the liquidation proceedings, the effect of corporate governance, the duties and responsibilities of liquidators and all

f the creditors’rights.22 Second, the

court explained that the liquidation proceedings were primarily administrative in nature because the liquidators’ tasks of collecting assets, distributing assets pursuant to priorities, conduct- ing investigations of potentially avoid- able transactions, preparing reports and convening meetings with creditors are administrative, and the proceedings were “at times judicial in character” when the Australian Court exercised its supervisor powers pursuant to the Corporations Act.23 Third, the bankruptcy court noted that a “proceeding is collective if it con- siders the rights and obligations of all creditors... ‘Liquidation is, like bankruptcy, a procedure of an inherently collective nature... The procedure is com- pulsory, in order to ensure that there is an

rderly, cooperative system. The result is

that any attempt by a creditor to under- mine the collective nature of liquidation is outlawed.’”24 The court concluded that the liquidation proceedings were “collective” because 62 creditors holding $1.9 billion of debt were represented at the second creditors’ meeting and the elec- tion to enter into liquidation required the votes of the majority of creditors in num- ber and amount of debt.25 Additionally, the bankruptcy court overruled RCS’s argument that the court should consider the chapter 15 petitions as requests for recognition of the receivership proceedings because the bank syndicates were in control and the liquidation proceedings were for their own benefit.26 The court disagreed with RCS because Australian law provides for the coexistence of liquidation and receivership proceedings.27 The liquidators were appointed by the whole creditor body to wind up the company’s affairs and ultimately dissolve it, and specifically collect assets, establish- ing claim reconciliation deadlines and distribute assets pursuant to the priority waterfall of the Corporations Act while the receivers were appointed by the secured lenders to recover secured assets for the secured lenders.28 The court found that the receivership and liquidation proceedings were separate and distinct proceedings, should be judged on their own merits and were “collective in nature.”29 Fourth, the bankruptcy court found that the liquidation proceedings were undisputedly located in Australia and therefore met the “located in a foreign country” requirement of § 101(23).30 Fifth, the court explained that the Corporations Act governs Australian corporations from incorporation to liquidation and that several provisions of the Corporations Act addressed insolvency and corporate debt adjustments.31 Therefore, the Corporations Act met the “authorized or conducted under a law related to insolvency of the adjustment

f debts” element of § 101(23).32

Sixth, the Australian court had sig- nificant supervision and control over the debtors’ voluntary administration proceedings, which continued in the liquidation proceedings.33 The Corporations Act provided the Australian court with the power to replace the liquidator and

ther avenues for appeal.34 As a result,

the debtors met the “subject to the control or supervision of a foreign court” requirement of § 101(23).35 The debtors’ case met the final element of § 101(23), the “reorganization or liquidation” purpose, because the creditors voted to commence a wind-up of the company.36 The next issue that the bankruptcy court examined was whether the Australian liquidation proceedings met the requirements for recognition pursuant to § 1517 of the Code.37 The court easily found that the chapter 15 peti- tion met the procedural requirements of § 1517(a)(2) and (3).38 However, in examining whether the recognition proceeding is a “foreign main” or “foreign non-main” proceeding pursuant to § 1517(a)(1), the bankruptcy court uti- lized the center of main interest (COMI) factors from In re Bear Stearns:39 (1) the location of the debtor’s headquarters, (2) the location of those actually managing the debtor, (3) the location of the debt-

r’s primary assets, (4) the location of

the majority of the debtor’s creditors or

f a majority of the creditors who would

be affected by the case, and/or (5) the jurisdiction whose law would apply to most disputes.40 The court found that the debtors’ COMI was Australia and that the liquidation proceedings were foreign main proceedings under §§ 1517 and 1502(4) because the evidence was undis- puted that the “Debtors are incorporated and registered in Australia; Debtors are listed on the Australian stock exchange; Debtors’ directors, the Liquidators and the Receivers reside in Australia; Debtors’ principal place of business is Australia; Debtors’ books and records are located in Australia; the majority of the Debtors’ assets are located in Australia; the majority of the Debtors’ creditors are located in Australia; the Debtors’ liquidations and receiverships were initiated and are proceeding under Australian law.”41

Court Analysis of the Public Policy Exception

The bankruptcy court next addressed RCS’s argument that the recognition of the debtors’ liquidation proceedings were manifestly contrary to U.S. public policy pursuant to § 1506 of the Code.42 Section 1506 provides that “[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.”43 RCS argued that the debtors sought recognition of the liquidation proceedings at the request of the receivers and bank syndicate for the purpose of gaining an unfair advantage in the Arizona and Nevada litigation and the benefit of the automatic stay.44 20 ABC, 2010 WL 5439808 at *5 (quoting 11 U.S.C. § 101(23)). 21 ABC, 2010 WL 5439808 at *5 (quoting฀In฀re฀Betcorp฀Ltd., 400 B.R. 266, 278 (Bankr. D. Nev. 2009)). 22 ABC, 2010 WL 5439808 at *6. 23 ABC, 2010 WL 5439808 at *6. 24 ABC, 2010 WL 5439808 at *6 (quoting In฀re฀Betcorp฀Ltd., 400 B.R. 266, 281 (Bankr. D. Nev. 2009)). 25 ABC, 2010 WL 5439808 at *6. 26 ABC, 2010 WL 5439808 at *7. 27 ABC, 2010 WL 5439808 at *8. 28 ABC, 2010 WL 5439808 at *8. 29 ABC, 2010 WL 5439808 at *8. 30 ABC, 2010 WL 5439808 at *8. 31 ABC, 2010 WL 5439808 at *9. 32 ABC, 2010 WL 5439808 at *9. 33 ABC, 2010 WL 5439808 at *9. 34 ABC, 2010 WL 5439808 at *9. 35 ABC, 2010 WL 5439808 at *9. 36 ABC, 2010 WL 5439808 at *10. 37 ABC, 2010 WL 5439808 at *10. 38 ABC, 2010 WL 5439808 at *11-12. 39 389 B.R. 325 (S.D.N.Y. 2008). 40 ABC, 2010 WL 5439808 at *11 (relying on In฀re฀Bear฀Stearns, 389 B.R. 325 (S.D.N.Y. 2008)). 41 ABC, 2010 WL 5439808 at *11. 42 ABC, 2010 WL 5439808 at *12. 43 11 U.S.C. § 1506. 44 ABC, 2010 WL 5439808 at *13.

SLIDE 3 The court was not convinced that the effect on the litigation with RCS was the motivating force for the debtors’ chapter 15 petitions.45 The bankruptcy court also explained that the debtors were not seeking any protections beyond what U.S. debtors receive, including a stay of litigation as provided in § 362(1) and (2) of the Code.46 Therefore, the court found that the recognition of the debtors’ liquidation proceedings was not manifestly contrary to U.S. public policy and did not deny recognition pursuant to § 1506.47

Conclusion

The ABC Learning decision rein- forces the general recognition requirements of chapter 15 petitions as well as the COMI tests. Foreign debtors may seek chapter 15 for the benefits of the automatic stay just as chapter 11 debtors do, and such actions will not be deemed manifestly contrary to U.S. public policy. n Reprinted฀with฀permission฀from฀the฀ABI฀ Journal,฀Vol.฀XXX,฀No.฀2,฀March฀2011. The฀ American฀ Bankruptcy฀ Institute฀ is฀ a฀ multi-disciplinary,฀nonpartisan฀organization฀ devoted฀ to฀ bankruptcy฀ issues.฀ ABI฀ has฀ more฀than฀13,000฀members,฀representing฀ all฀facets฀of฀the฀insolvency฀fjeld.฀For฀more฀ information,฀ visit฀ ABI฀ World฀ at฀ www. abiworld.org. 44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org 45 ABC, 2010 WL 5439808 at *13. 46 ABC, 2010 WL 5439808 at *13. 47 ABC, 2010 WL 5439808 at *14.