In re Ashapura: Southern District of New York Holds that Proceeding Under Repealed Foreign Law is Entitled to Chapter 15 Recognition

by Cadwalader, Wickersham & Taft LLP
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[authors: Michael A. Stevens]

On June 28, 2012, Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York affirmed the order of the United States Bankruptcy Court for the Southern District of New York granting Ahapura Minechem Ltd.’s petition for recognition of its Indian insolvency proceeding as a foreign main proceeding under chapter 15 of the Bankruptcy Code. Armada v. Shah (In re Ashapura Minechem Ltd.), 2012 WL 2478467 (S.D.N.Y. June 28, 2012). In so holding, the District Court approved the recognition of a proceeding governed by a statute, The Sick Industrial Companies Act (“SICA”), that Indian legal scholars have sharply criticized and that the Indian legislature actually repealed in 2003.

Chapter 15 of the Bankruptcy Code governs petitions for the recognition of foreign insolvency proceedings in the United States. To achieve recognition under Chapter 15, a debtor’s appointed representative must demonstrate that the debtor’s proceeding is a “foreign proceeding” as defined by section 101(23) of the Bankruptcy Code by proving each of seven elements: (i) the existence of a proceeding, (ii) that is either judicial or administrative, (iii) that is collective in nature, (iv) that is in a foreign country, (v) that is authorized or conducted under a law related to the insolvency or adjustment of debtors, (vi) in which the debtor’s assets and affairs are subject to the control or supervision of a foreign court, and (vii) which proceeding is for the purpose of reorganization or liquidation. In addition, pursuant to section 1506 of the Bankruptcy Code, a court may refuse to recognize a foreign proceeding under chapter 15 if such recognition would be manifestly contrary to the public policy of the United States. This public policy exception is interpreted narrowly, however, and only invoked in exceptional circumstances.

Background

Ashapura is a mining and industrial business primarily located in India that was party to a contract with Armada (Singapore) Pte Ltd. to ship minerals to foreign ports. After the government of Gujurat, the Indian state where Ashapura conducts its mining, placed an indirect embargo on the export of bauxite, Ashapura was unable to fulfill its contract with Armada. In February 2010, Armada obtained a $65 million arbitration award against Ashapura for Ashapura’s breach of the contract. In June 2010, Armada filed a petition in the Southern District of New York for an order converting the arbitration award into a judgment against Ashapura, and the District Court granted the petition.

In May 2011, Ashapura initiated a restructuring proceedings under SICA with India’s Board of Industrial and Financial Reconstruction (“BIFR”). Notably, the Indian government repealed SICA in 2003 in response to substantial criticism of the statute. However, because the Indian government has yet to formally enact legislation implementing SICA’s substitute, SICA remains in force and is still adhered to in India. Ashapura’s managing director then filed a petition in the Bankruptcy Court for recognition of the SICA proceeding as a “foreign proceeding” or “foreign main proceeding” pursuant to chapter 15 of the Bankruptcy Code. The Bankruptcy Court granted recognition of the SICA proceeding as a foreign main proceeding. Thus, the District Court’s judgment against Ashapura was stayed pursuant to section 1520(a) of the Bankruptcy Code (which incorporates the automatic stay of section 362 of the Bankruptcy Code upon recognition of a foreign main proceeding). Armada appealed these rulings to the District Court.

Analysis

In its appeal, Armada argued primarily that Ashapura’s Indian SICA proceeding should not have been recognized by the U.S. court because Ashapura failed to prove that the SICA proceeding was collective in nature, or that Ashapura’s affairs, as well as assets, were subject to the BIFR’s control or supervision. The District Court rejected Armada’s arguments and affirmed the Bankruptcy Court’s decision.

The primary consideration in determining whether a proceeding is collective “is whether all creditors’ interests were considered in the proceeding.” Ashapura, 2012 WL 2478467, at *5. Relying solely on the scholarly criticisms of SICA that contributed to SICA’s repeal, Armada argued that Ashapura’s proceeding is not collective because unsecured creditors have no statutory right under SICA to participate in SICA proceedings. While SICA does not per se provide for unsecured creditor participation and such participation is left to the BIFR’s discretion, the District Court found that, in practice, unsecured creditors may participate in SICA proceedings by making an application to implead themselves as parties in interest. Indeed, the BIFR had already impleaded several unsecured creditors into Ashapura’s SICA proceeding. Unsecured creditors also have the right to appeal the BIFR’s refusal to grant impleader applications and contest a debtor’s “rehabilitation or distribution scheme” whether or not they are impleaded. In addition, the District Court found that SICA proceedings offer adequate notice, opportunity for appellate review within the Indian legal system, and statutory priorities for distribution. Accordingly, because the determination of whether a proceeding is collective involves “not just what statutory mechanisms exist but also how involved creditors are in practice,” the District Court held that Ashapura’s SICA proceeding was collective in nature. Id. at *6.

As noted above, the court administering a foreign proceeding must have control or supervision over both a debtor’s assets and its affairs for that proceeding to qualify for chapter 15 recognition. Courts apply a “low legal standard for supervision over a debtor’s affairs,” and a foreign court “need not direct the day-to-day operations of a debtor to meet that standard.”  Id. at *7. While the District Court rejected Ashapura’s primary argument that the BIFR’s supervision over the process of approving a debtor’s plan of rehabilitation constituted supervision of a debtor’s affairs, the District Court found that other evidence in the record established the requisite supervision. Specifically, SICA provides the BIFR with a set of guidelines to impose on a “sick” company in order to regulate against fraudulent and preferential transfers and grants the BIFR authority to suspend the operation of contracts, settlements, and awards. The District Court found that these provisions addressed a debtor’s affairs and held that Ashapura met its low burden of proving that the BIFR has supervision or control over Ashapura’s affairs.

Conclusion

The District Court’s decision in Ashapura demonstrates the relatively low bar set by bankruptcy courts for foreign debtors seeking recognition of a foreign proceeding pursuant to chapter 15 of the Bankruptcy Code. Here, the District Court affirmed the recognition of a proceeding governed by a statute that the Indian legislature itself had repudiated and that does not explicitly provide for unsecured creditor participation. Such factors proved unpersuasive, however, under the expansive definition of a “foreign proceeding” used by the District Court, which found that Ashapura had met its statutory burden despite such deficiencies.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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