Bankruptcy Court Clarifies Requirements for Recognition of a Foreign Proceeding Under Chapter 15

The Bottom Line

In In re PT Bakrie Telecom Tbk, Ch. 11 Case No. 18-10200 (SHL) (Bankr. S.D.N.Y. May 30, 2019), the Bankruptcy Court for the Southern District of New York denied a noteholder group’s request for summary judgment seeking denial of recognition of a foreign proceeding under Chapter 15 of the Bankruptcy Code because the debtor had sufficient property in the United States, the appointment of the foreign representative was effective and the Indonesian proceeding was a collective one.

What Happened?

Prior to filing for bankruptcy, PT Bakrie Telecom Tbk (“BTEL”) caused Bakrie Telecom Pte. Ltd. (the “Issuer”) to be created for the sole purpose of issuing US$380 million in 11.5% guaranteed senior notes due 2015 on behalf of BTEL (the “Notes”) pursuant to an intercompany loan agreement and a supplemental intercompany loan agreement. BTEL guaranteed the notes pursuant to a parent guarantee (the “Parent Guarantee”) and PT Bakrie Network and PT Bakrie Connectivity (the “Subsidiary Guarantors”) guaranteed the Notes pursuant to a subsidiary guarantee (the “Subsidiary Guarantee”). The indenture, the Parent Guarantee and the Subsidiary Guarantee are governed by New York law and the indenture contains a New York forum selection clause. The Bank of New York Mellon is the Indenture Trustee.

BTEL, the Issuer, and the Subsidiary Guarantors (collectively, the “Individual Defendants”) ultimately defaulted on the Notes. Accordingly, purchasers and beneficial holders of the Notes (the “Objecting Noteholders”) commenced litigation in New York State court against the Individual Defendants for breach of the Notes. Around the same time, one of BTEL’s other creditors filed a PKPU application, i.e., a court-enforced suspension of payments process in Indonesia that is designed to provide a debtor a definite period of time to restructure its debt and reorganize its affairs pursuant to a plan, against BTEL in the Central Jakarta Commercial Court. The Objecting Noteholders argued that they were excluded from voting on the plan and participating in the PKPU process and commenced a second action in New York State court seeking a declaratory judgment that the PKPU proceedings were invalid, which was subsequently consolidated with the other claims already pending in New York State court.

The New York court granted summary judgment on the Objecting Noteholders’ breach of contract claim and sustained the claims against the Issuer and Subsidiary Guarantors for fraud, but dismissed the claims against the Individual Defendants for lack of personal jurisdiction. The New York Appellate Division affirmed.

Shortly thereafter, Jastiro Abi, who was a director of both BTEL and the Issuer at the time of the offering, was appointed to serve as BTEL’s foreign representative, which authorized him to file a petition under Chapter 15 of the Bankruptcy Code. He filed the Chapter 15 case in late January 2018. Shortly after the filing, the Individual Defendants stipulated to entry of judgment in the amount of US$161,614,872.09 on the Objecting Noteholders’ breach of contract claim in the New York litigation and the Objecting Noteholders stipulated not to enforce the money judgment pending resolution of the Chapter 15 case.

In late 2018, the Objecting Noteholders filed a motion for summary judgment (the “Motion”), arguing that the debtor cannot satisfy the following requirements for recognition of the PKPU proceeding: (i) the property requirement of Bankruptcy Code Section 109(a); (ii) the appointment of a foreign representative within the meaning of Sections 101(24) and 1515(a) of the Bankruptcy Code; and (iii) the requirement that the proceeding be collective as defined by Section 101(23) and not be manifestly contrary to U.S. public policy as required by Section 1506. The court denied the Motion.

• Property requirement

First, the Objecting Noteholders moved to deny recognition of the debtor’s foreign proceeding on the basis that the debtor does not have property in the United States sufficient to satisfy Bankruptcy Code Section 109’s property requirement. The court disagreed, explaining that the indenture governing the Notes creates property rights for the debtor sufficient to satisfy Section 109’s property requirement. In support for its proposition, the court cited In re Berau Capital Res. PTE Ltd., which held that a foreign debtor’s U.S. dollar-denominated debt indenture that was governed by New York law provided a “substantial basis” for finding that the debtor satisfied the property requirement. 540 B.R. 80, 82 (Bankr. S.D.N.Y. 2015).

• Appointment of foreign representative

Second, the Objecting Noteholders argued that petitioner Abi was not a foreign representative within the meaning of Section 101(24) of the Bankruptcy Code because his appointment did not occur until three years after the conclusion of the PKPU proceeding, meaning that his appointment did not occur “in the context of” the foreign proceeding. The court denied this argument, clarifying that “the requirement that a foreign representative be authorized in a foreign proceeding is not an onerous one” and “has been read broadly in order to facilitate the purposes of Chapter 15.” In re PT Bakrie Telecom Tbk, at 15. Moreover, the court was unable to find any authority explicitly precluding the appointment of a foreign representative after the foreign proceeding has been closed. The court noted “given the policy underlying Chapter 15, it would be hard to imagine why such action would be categorically prohibited.” Id. at 17. In addition, the court noted that a board could appoint a foreign representative and it need not be an appointment by a tribunal. Id. at 15.

• “Collective” proceeding requirement

Last, the Objecting Noteholders asserted that the PKPU proceeding was not a collective proceeding because it didn’t include the Objecting Noteholders’ interests since they were denied the right to vote. The court rejected this argument as well, considering, among other things, evidence that both counsel to the Objecting Noteholders and to the Indenture Trustee were permitted to make submissions and arguments to the officials overseeing the PKPU proceedings regarding their positions, that creditors in a similar position to the Objecting Noteholders’ supported the plan, and that there were questions of fact regarding whether the plan would have been denied if the Indenture Trustee had been permitted to vote.

Why This Case Is Interesting

This case is interesting because it provides transparency for debtors and creditors regarding the eligibility requirements for filing a bankruptcy case under Chapter 15. Specifically, it informs parties that there is a low bar to satisfy the property requirement of Section 109 — simply issuing bonds pursuant to an indenture that is governed by New York law or contains a New York forum selection clause is enough. Moreover, delay in appointing a foreign representative until after the foreign proceeding has concluded does not preclude Chapter 15 eligibility. Last, it appears the court gave deference to the foreign court regarding how the proceeding was run and the independence of the officials that participated therein when evaluating whether there was a “collective” proceeding.