The purpose of Chapter 15 is to provide effective mechanisms for dealing with cases of cross-border insolvency, with the express objectives of (i) fostering cooperation between U.S. and foreign courts, (ii) ensuring the fair and efficient administration of cross-border insolvencies and (iii) protecting and maximizing the value of the foreign debtor’s assets, among other things. See 11 U.S.C. § 1501. Naturally, for a foreign debtor to access the many protections of Chapter 15, there must be a pending insolvency proceeding in a foreign country. The Bankruptcy Code defines a “foreign proceeding” as “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 subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” 11 U.S.C. § 101(23). The Bankruptcy Code does not, however, define “collective” and courts have been left to provide their own interpretation of that critical word.
In PT Bakrie, Judge Lane found that the debtor’s Indonesian insolvency proceeding constituted a collective proceeding for purposes of Chapter 15 recognition. The proceeding — a Penundaan Kewajiban Pembayaran Utang (or Suspension of Debt Payment Obligations) – was commenced in 2014 following a payment default on certain notes that were issued by a subsidiary of the debtor (the “Issuer”) and guaranteed by the debtor and other subsidiaries. The proceeds of the notes had been upstreamed to PT Bakrie pursuant to certain intercompany loan agreements which were then assigned to the indenture trustee on account of the notes (the “Indenture Trustee”). A glaring issue during the PKPU proceeding was the identity of the proper party for purposes of voting the claims represented by the intercompany notes – the Issuer (an insider and the creditor in respect of the intercompany notes) or the Indenture Trustee (as the assignee of the intercompany notes). These claims accounted for approximately 56% of the unsecured debt and could determine the fate of PT Bakrie’s debt restructuring plan (the “PKPU Plan”). Certain noteholders (the “Objecting Noteholders”) argued that the Issuer had transferred to the Indenture Trustee all rights in respect of the intercompany notes, including the right to submit proofs of claim and to vote on any restructuring plan of PT Bakrie. Pt Bakrie, however, presented a “Record and Report” that identified the Issuer as the proper creditor. Ultimately, following litigation before the Indonesian Commercial Court, the claims of the Indenture Trustee (on behalf of the Objecting Noteholders and others) were rejected, and the Issuer voted in favor of the PKPU Plan. In late 2014 the PKPU Plan was approved by the Commercial Court, and later approved and affirmed by higher courts. See Bakrie at 2-5.
The Objecting Noteholders did not rest. Having already commenced an action in New York state court prior to the PKPU proceeding, they commenced a second action seeking, among other things, a declaratory judgement that the PKPU proceeding was improper and seeking judgments against the Issuer and other related parties. In late 2017, following contentious litigation and appeals, the matter was back in the trial court. The lower court’s summary judgment rulings as to liability against the Issuer and others was sustained, and it’s dismissal of actions against certain others overruled. Jurisdictional discovery was set to proceed. Having failed in the state court, PT Bakrie appointed a foreign representative. The Chapter 15 case was commenced in January 2018 – three years after closing of the PKPU proceeding — for purposes of recognizing the PKPU Plan and seeking other relief. The debtor, the Issuer and certain others stipulated to entry of judgment in an amount in excess of $161 million and the Objecting Noteholders agreed not to execute or enforce the judgment pending the Chapter 15 case. See Id. at 5.
The Objecting Noteholders objected to recognition of the Chapter 15 case on a number of grounds, including that the proceeding was not a “collective proceeding.” In his opinion, Judge Lane cites a number of characteristics of a collective proceeding for purposes of Chapter 15. These include, broadly: (i) that there be adequate notice to creditors under applicable law, (ii) that the proceeding include provisions for the distribution of assets according to statutory priorities, and (iii) that a statutory mechanism for creditors to seek court review exist. The Objecting Noteholders premised their argument on the fact that they were improperly prevented from voting on the PKPU Plan. Judge Lane disagreed. He concluded that the PKPU proceeding satisfied the standard for a “collective proceeding” because the rights and obligations of the Objecting Noteholders, and all other creditors, were considered by the foreign court. While the rulings in the Indonesian courts did not go in their favor, the Objecting Noteholders were active participants in the proceeding and had opportunities to make their arguments before the debtor’s administrators and the Commercial Court. Although the decisions of the administrators and the rulings of the courts ultimately left the noteholders without a vote on the PKPU Plan, the process itself was a “collective” one. See Id. at 7-10,
The Court noted that other factors weighed in favor of the ruling, including that notice was provided to all creditors, that the appellate court reviewed the trial court’s decision, and that statutory priorities existed for the distribution of the debtor’s assets. Having found that the PKPU proceeding was collective and satisfied the other requirements for recognition, Judge Lane recognized the proceeding as a foreign main proceeding under Section 1517 of the Bankruptcy Code. See Id. at 10.
In the instant case, the Objecting Noteholders’ objection to the collective nature of the proceeding was focused on their assertions of disenfranchisement, rather than on the proceeding itself. Indeed, Bankruptcy Courts in other cases have recognized Indonesian PKPUs as collective proceedings for purposes of Chapter 15. For purposes of determining whether a proceeding is “collective,” the substantive rulings of foreign officials and courts should hold little weight. Instead, the focus of a Bankruptcy Court’s review when determining the gating issue of whether a proceeding is properly a foreign proceeding should be on the process itself, not the results.