The Mutuelle du Mans Assurance Account Chapter 15 decision has given rise to a series of "firsts", according to Selinda Melnik
A US Bankruptcy Court has now spoken in answer to the following question posed last autumn: Whether, post-BAIC, US courts will continue to recognise UK solvent schemes of arrangement for insurance and reinsurance in run-off, and whether they will do so in cases filed under untested new Chapter 15 of the US Bankruptcy Code scheduled to replace US Bankruptcy Code section 304 as of 17 October 2005.
The answer to both questions is "Yes" - at least under the circumstances presented to that Court.
The MMA Account Chapter 15 Case
On 8 December 2005, the Honorable Burton R Lifland of the US Bankruptcy Court for the Southern District of New York issued an Order under Chapter 15 of the US Bankruptcy Code in aid of the scheme of arrangement for a marine insurance account of the UK Branch of La Mutuelle du Mans Assurance IARD (the MMA Account) that had been sanctioned by the High Court of England and Wales under Section 425 of the Companies Act 1985.
The MMA Account Chapter 15 decision is notable for more than its important support of a solvent scheme, as it spawned a series of "firsts" under US bankruptcy law. The MMA Account Order was the first entered in a case filed under new US Chapter 15 in aid of a foreign business debtor. The case itself was the first in which comprehensive pleadings translating complex Chapter 15 theory into practice were developed and presented for consideration to a court. It was also the first Chapter 15 case in which a full evidentiary hearing was held (including the taking of testimony from witnesses both by counsel and the Court), and findings of facts and conclusions of law were issued by the Court on the record at the hearing, further supported by the Order as entered by the Court. Perhaps of greatest significance, however, is the fact that the case marks the first time a US court has interpreted where the "centre of main interests" of a foreign debtor lies (a hotly contested jurisdictional concept in the European Union) and the first time a US court has found that something less than the entirety of a company may be a debtor entitled to relief.
While no formal objections to the MMA Account Chapter 15 Petition were filed, the Court sua sponte engaged in an extensive investigation of, among other things, the conduct of the scheme process in England, the notifications and documentation provided to scheme creditors and other parties in interest, the conduct of the Meeting of Scheme Creditors, the process of adjudicating scheme claims, and the determinations by the High Court of England and Wales leading up to the sanctioning of the proposed scheme, including respecting jurisdiction to entertain the scheme. The Court's self-directed consideration of these issues was not unusual. Chapter 15 requires the US Bankruptcy Court to make several determinations before it may grant recognition of a non-US proceeding and relief requested in aid thereof. Those determinations by the Court are mandatory even if no objection to the Chapter 15 Petition or the relief requested is lodged.
In issuing its Order granting the recognition and relief requested, the MMA Account Chapter 15 Court firstly had to determine, among other things, that the scheme of arrangement proceeding in the UK was a "foreign proceeding" as defined under the US Bankruptcy Code as it was amended in 2005. The definition of "foreign proceeding" in the prior incarnation of the code was found by at least one US Bankruptcy Court to not include a transfer scheme proposed under Part VII of the Financial Services and Marketing Act 2000. Solvent schemes under Section 425 of the Companies Act 1985 also had been challenged as not being within the pre-2005 definition of "foreign proceeding." As amended in 2005, "foreign proceeding" is defined to include proceedings related to "debt adjustment". The MMA Account scheme of arrangement under Section 425 of the Companies Act was put forward as a "foreign proceeding" entitled to Chapter 15 recognition and relief on that basis and was so upheld.
The issue of jurisdiction is of particular importance in Chapter 15 cases.
Among other things, under Chapter 15, if the non-US proceeding is pending in the jurisdiction where the non-US debtor has its "centre of main interest," that proceeding will be found to be a "foreign main proceeding" under Chapter 15, which automatically entitles the petitioner to certain relief, including injunctive relief, that previously, under former Section 304, would only be available at the discretion of the bankruptcy court following a determination that a number of key predicates had been met.
Jurisdiction indeed was central to the Court in the MMA Account Chapter 15 case, which presented the unique situation of a foreign proceeding involving a book of business, rather than all of the liabilities and assets of a corporation. In addition, that book of business was written by the UK branch of a French insurance company. The Court noted that a company's "centre of main interest" is presumed under Chapter 15 to be the location of its incorporation or charter, which, in this case, the Court stated would be France. The Court found, however, that the debtor in this instance was the book of marine insurance business written on the UK branch and that its "centre of main interest" was sited in the UK and "lodged within the jurisdiction" of the High Court of England and Wales. Accordingly, the Court recognised the MMA Account scheme as a "foreign main proceeding" automatically entitled to a range of relief including injunction against acts against the debtor or its assets in the US. The Court also exercised its discretion to grant additional relief under Chapter 15, including all such relief requested by the petitioner.
Finally, due process - adequate notice and an opportunity to be heard - is of particular importance generally under US law and its requirement is expressly set forth in new Chapter 15, including a section of that chapter addressing notice to creditors having addresses outside of the US. The Court, therefore, explored in detail the nature, range and extent of notice provided to scheme creditors and other parties in interest both with respect to the scheme process in the UK and the Chapter 15 case, and found such notice to be adequate and appropriate.
Caveat scheme proponents
The complexities presented by the MMA Account situation in the context of new US Chapter 15 enabled a fleshing out of that new law early on in a way that would not have occurred in the classic case of a traditional non-US company seeking ancillary assistance for its US-type insolvency or reorganisation proceeding. Applying Chapter 15, and the rules promulgated for its implementation, to the intricacies of the MMA Account situation unearthed numerous ambiguities in the new law as well as aspects of it not clearly apparent. Through that process, challenges and opportunities, particularly for insurance and reinsurance run-off scheme proponents, became apparent, and mechanisms for their resolution and optimisation were devised. The success of future attempts to aid run-off schemes through Chapter 15 likely will depend in great part on the manner in which the particular circumstances of the scheme and its process are woven into the many corners of Chapter 15 and ultimately presented to the US court.
- Edwards Angell Palmer & Dodge was US counsel for the petitioner in the MMA Account Chapter 15 case.
- Selinda Melnik is a partner in the Creditors' Rights, Bankruptcy and Insolvency Group of Edwards Angell Palmer & Dodge.
1. Chapter 15 of the US Bankruptcy Code replaces, and significantly expands beyond, former section 304 of the code, to which proponents of UK schemes of arrangement have looked to obtain relief from US courts in aid of the implementation of the scheme, including through issuance of injunctions against the taking of actions against the debtor or its assets within the US. Readers of Global Reinsurance are familiar with recent challenges to solvent schemes presented by, now, old US section 304. See, eg, Melnik, "Help from the US?", Global Reinsurance, March 2005.
Run-off US Bankruptcy Code - Chapter 15
"Chapter 15, which became effective 17 October 2005, incorporates into United States Bankruptcy law the "Model Law on Cross-Border Insolvency" adopted by the United Nations in 1997 following more than three years of deliberation by the UN Commission on International Trade Law (UNCITRAL). Among other things, Chapter 15 broadens the mechanism through which representatives of non-US proceedings might obtain relief, including injunctive relief, in the United States, expands the powers of US bankruptcy courts, and enhances the rights of both US and non-US creditors.