Corporate Bankruptcy Tourists

Abstract

Corporate debtors facing financial distress have a choice: file bankruptcy in their home jurisdiction or file in the United States. And some number of foreign corporations do file bankruptcy petitions in the United States.

We expect this trend to increase in the coming years for two simple reasons. First, the amount of high-yield bond debt being issued in Europe has reached record levels. Second, by and large European jurisdictions, even the United Kingdom, have relatively little experience restructuring bond debt and complex capital structures.

Historically and continuing to today, banks primarily financed European businesses. This means that existing insolvency procedures are largely focused on the relationship between a debtor and a compact group of senior lenders. That will change when the new bond debt becomes distressed, but there is little reason to think that legal regimes will adapt in sufficient time to address the issue.

Thus, we expect to see more European firms filing for bankruptcy in the United States.

But besides the occasional anecdotal account, how frequently this already happens or what types of foreign firms are apt to file in the United States is almost completely unstudied. American firms that file under chapter 11 and foreign firms that file under chapter 15 are the frequent objects of study, but what of the foreign firms that file under chapters 7 or 11?

We address this obvious gap in the literature by constructing a database of foreign corporate debtors.

By analyzing this new dataset, we conclude that the United States Bankruptcy Code is used by foreign debtors in a way that is diametrically opposed to most of the extant thinking on transnational insolvency. In particular, foreign debtors use the American bankruptcy system to impose a global discharge on assets, without the cooperation of any jurisdiction beyond the United States, where the case is pending. This is in complete contrast with the efforts of UNCITRAL to facilitate cross-border cooperation among jurisdictions.

Keywords: Chapter 11, international bankruptcy, financial distress, schemes of arrangement, Chapter 15, cross border insolvency, forum shopping