Welcome to America:
Why Foreign Filers Are
Finding a Home
with Chapter 11

When it comes to filing for bankruptcy, large foreign businesses are increasingly turning to the U.S. and opting for Chapter 11 as they seek to restructure their businesses, sell assets or even liquidate. According to the UCLA School of Law’s Bankruptcy Research Database, more than a dozen large foreign corporations, from airlines to oil drillers to satellite companies, filed bankruptcy cases in the country last year – that’s more than double the previous high mark set in 2002¹. It’s a number that’s only expected to accelerate in 2022, particularly for small and mid-size businesses that do not have the broader access to capital markets that larger entities enjoy. Lingering supply chain slowdowns, factory shutdowns, labor shortages and increasing energy costs are all set to play a part².

In the past, companies have tended to utilize Chapter 11 to implement a prepackaged restructuring agreed prior to filing with a group of the company’s creditors³. However, major foreign companies including large airlines in Chile, Colombia, and Mexico, as well as the world’s largest offshore and well drilling company, based in London, have recently filed “free-fall” cases – those without a pre-negotiated restructuring plan prior to filing. Again, this is a trend that’s likely to continue into 2022 as Chapter 11 becomes more familiar to practitioners abroad as foreign businesses and their advisors complete successful reorganizations, sales, or liquidations in this country. Colombian airline Avianca is the first of three large foreign airlines that filed Chapter 11 in the United States in 2020 to have its Chapter 11 plan confirmed (as of November 3, 2021).

So, why the growing interest in Chapter 11?

Relative Benefits

Foreign filers like Avianca are increasingly attracted to the Chapter 11 route because it is often easier to become a debtor under the arrangement compared to certain local jurisdictions. Companies merely need to reside or have domicile, a place of business or property in the U.S. to become a Chapter 11 debtor, and it is the property element of this criteria that is particularly broad. Put simply, there’s no threshold or minimum amount of assets that are required for businesses to be eligible. In fact, U.S. bankruptcy courts that have considered the issue have found even a minimal amount of property in the country, even the funds a prospective debtor has in a lawyer’s retainer account, for example, can be acceptable⁴.

In addition to the ease of meeting the eligibility criteria, the U.S. Bankruptcy Code also provides benefits that debtors may not receive under their home country’s laws. Unlike the UK or Canada, debtors retain management control of the company and continue to control assets and run their operations as a debtor in possession (“DIP”) in all but the most extraordinary circumstances, such as fraud or mismanagement. Otherwise, there is no trustee or administrator appointed to run the company or manage the debtor’s assets.

And the benefits don’t stop there. Businesses filing under Chapter 11 can also immediately leverage bankruptcy’s automatic stay. This gives them breathing space by providing an injunction against any potential attempts to enforce or collect claims against them, purportedly whether these originate from the U.S. or beyond⁵.

Companies using Chapter 11 are also still able to access capital markets to secure financing during their case – something they might not find a well-developed market for in their home country. Financing for these debtors-in-possession is not unusual in the U.S. – in fact, it is common and there is an established market for such financing where, with court approval, funds can be secured from a debtor’s current lenders or even third parties. In fact, all three major foreign airlines that filed Chapter 11 in 2020, LATAM Airlines Group, Avianca and Grupo Aeroméxico, are just some of the companies that have received bankruptcy court approval for DIP financing⁶^.

Emergence From Restructuring

The ability to exit a court-supervised restructuring scheme as a reorganized entity may even be more important to a prospective debtor than its eligibility to enter a restructuring scheme in the first place. Unlike many other countries, approving restructuring plans can be a much more straightforward process in the U.S. While other markets may require a debtor to gain approval from up to 75% of its creditors, in the U.S. it is a lower threshold requiring just two-thirds in amount and more than one-half in number of the allowed claims in a particular claims class. Additionally, in the U.S., debtors can ‘cram down’ a restructuring plan on dissenting creditors. Debtors can even commence so-called ‘avoidance’ actions that allow them to unwind transfers that have been made to or for the benefit of non-debtor parties that took place prior to the debtor’s filing.

Filing Chapter 11 can be beneficial to debtors that do not plan to continue operating certain lines of business (or their business entirely) as well. Chapter 11 debtors can sell any or all of their assets through Chapter 11 free and clear of liens, allowing the debtor to quickly realize the value of these assets in a period as little as two to four months.

Finally, debtors retain the ability to keep certain favorable contracts, while terminating those that are disadvantageous. This is a powerful tool for debtors seeking to either reorganize their businesses, or market or sell assets while shedding those that are undesirable.

There are clear advantages with Chapter 11 for companies that need to restructure, sell assets, or liquidate. It is no surprise then that a growing number of companies are increasingly taking advantage of Chapter 11’s broad criteria and track record of successful restructurings, and it is a trend that seems likely to continue through 2022.