Can a Board of Directors of a Foreign Entity Appoint the Foreign Representative in a U.S. Chapter 15 Filing Without First Obtaining Authority from the Foreign Bankruptcy Court?

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Contributed by Victoria Vron

This was the question before the Court in Compania Mexicana de Aviacion, S.A. de C.V., Case No. 10-14182 (MG) (Aug. 16, 2010).  In the Mexicana case, the United States Bankruptcy Court for the Southern District of New York was asked by a chapter 15 debtor, Compania Mexicana de Aviacion, S.A. de C.V.  (“Mexicana”), to issue a preliminary injunction affording section 362 type relief to Mexicana prior to recognition of Mexicana’s foreign main proceeding (the “Concurso Proceeding”).  The purported foreign representative of Mexicana, who was appointed as such by Mexicana’s board of directors made the request for the preliminary injunction.  At the time of the injunction request, the foreign representative had not yet been approved by the Mexican bankruptcy court in the Concurso Proceeding to act as the foreign representative.  Under Mexican bankruptcy law, there is generally a gap of at least several weeks between the commencement of the Concurso Proceeding and the time that the Mexican bankruptcy court approves a foreign representative.

At the preliminary injunction hearing, an objecting creditor asked the Court to determine whether the purported foreign representative even had authority to make the request for a preliminary injunction because she was not yet authorized to act as a foreign representative in the Concurso Proceeding.  The creditor pointed to section 101(24) of the Bankruptcy Code, which provides that:

The term “foreign representative” means a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.

Section 101(24) of the Bankruptcy Code was amended in 2005 with the enactment of chapter 15.  Previously, section 101(27) provided that:

The term “foreign representative” means duly selected trustee, administrator, or other representative of an estate in a foreign proceeding.

The objecting creditor pointed to the change in the language of section 101(24) as evidence that Congress intended to require that the foreign bankruptcy court authorize the foreign representative to act on behalf of a debtor in a chapter 15 case and not the debtor’s board of directors.

If the Court were to accept the objecting creditor’s argument, the result would have been to prevent chapter 15 debtors from obtaining any provisional relief in a chapter 15 case, or even commencing a chapter 15 case, until the foreign representative was formally appointed by the court in the foreign proceeding.  Because only a foreign representative is authorized to apply for recognition of a foreign proceeding under section 1515 and provisional relief under section 1519 of the Bankruptcy Code, in certain jurisdictions, such as Mexico, that could mean a delay of several weeks before a chapter 15 petition could be filed or before a debtor could obtain any provisional relief.  Such a delay may prejudice debtors in certain situations.

Recognizing this dilemma, the Court in Mexicana ruled that a board of directors can appoint a foreign representative on an interim basis pending approval of a foreign representative by the foreign bankruptcy court.  The Court pointed to the clause “including a person or body appointed on an interim basis” that appears in the current version of section 101(24) of the Bankruptcy Code as support for this holding.  The Court reasoned that in the Concurso Proceeding, management of Mexicana stays in control until the Mexican bankruptcy court replaces management.  Therefore, it found that it was appropriate for the board of directors to appoint a foreign representative until the Mexican bankruptcy court had a chance to approve such selection.  It was not clear from the Court’s ruling, however, whether a foreign representative who is appointed by a board of directors is deemed to be “authorized in the foreign proceeding” to administer the chapter 15 case.

Following the Mexicana Court’s logic, a case by case analysis of foreign bankruptcy laws is required to determine whether a foreign representative can be appointed on an interim basis in other chapter 15 cases.