US Bankruptcy Court denies motion to dismiss involuntary chapter 11 petition against Chinese real estate company

The United States Bankruptcy Court for the Southern District of New York (Court or New York Court) has denied Xinyuan Real Estate Company Ltd. (Xinyuan or Debtor)’s motion to dismiss an involuntary chapter 11 case filed against it by a group of noteholders.

The ruling, made on March 3, 2026, has implications for the interplay between United States bankruptcy proceedings and foreign schemes of arrangement, particularly when the foreign scheme is at an impasse.

Below, we discuss the background of the decision and its practical implications for foreign companies.

Background

Xinyuan is a Cayman Islands holding company and the ultimate parent of a group of companies that operate a property development business primarily in the People’s Republic of China. Following a downturn in China’s real estate market beginning in late 2020, Xinyuan experienced constraints on its ability to service its funded debt. In January 2025, facing an inability to repay $170 million in senior notes coming due that month, the company commenced restructuring negotiations with these noteholders. These senior notes (Existing Notes), which consist of four series with interest rates ranging from 3 percent to 14.5 percent and varying maturities, are all US dollar-denominated and governed by New York choice of law and forum selection clauses.

In April 2025, three Hong Kong-based investment funds holding approximately $65 million of Xinyuan’s 14-percent senior notes due 2024 (one tranche of the Existing Notes) filed an involuntary chapter 11 petition in the Southern District of New York. Shortly thereafter, in late June 2025, Xinyuan commenced a Cayman Islands scheme of arrangement to restructure approximately $600 million of its debt, including all four series of the Existing Notes, which included some debt held by the petitioning creditors. All of the company’s debt subject to the scheme was US dollar-denominated and subject to New York choice of law and forum selection clauses.

Rather than answer or contest the involuntary petition, Xinyuan sought multiple extensions of time to respond. The petitioning noteholders agreed to several extensions, but the Court eventually denied the Debtor’s further motion for extension based on its lack of progress in the Cayman Islands proceeding. Xinyuan then moved to dismiss the petition on three grounds:

• It asked the New York Court to abstain from taking the chapter 11 case in deference to the Cayman Islands proceeding
  
  
• It sought dismissal for cause, alleging that the petition was filed for an improper purpose to gain tactical negotiating leverage
  
  
• It contended that the New York Court was an inconvenient forum under the common law doctrine of forum non conveniens

The Court’s analysis

Abstention

The Court denied the Debtor’s request for abstention (which it described as an extraordinary remedy), finding that dismissal would not serve the best interests of creditors for several reasons. First, the Cayman Islands proceedings had stalled, with no activity since June 2025 and no convening hearing had been scheduled – a prerequisite first step for any scheme of arrangement. Second, only 31 percent of creditors supported the proposed scheme – far below the 75-percent threshold required under Cayman Islands law – and this support level had not increased since July 2025.

The Court also expressed concern with Xinyuan’s proposed classification of creditors, which would place all four tranches of notes (with interest rates ranging from 3 percent to 14.5 percent and varying maturities from 2023 to 2027) into a single class for identical treatment – an approach that would be impermissible under the US Bankruptcy Code without creditor consent. The Debtor had made only a brief attempt to justify this classification under Cayman Islands law, and, because no convening hearing had been held, the Cayman Islands court had not yet ruled on whether such classification was proper.

Additionally, the Court noted that, even if Xinyuan successfully obtained approval of a scheme in the Cayman Islands, it would face significant hurdles in obtaining recognition in the US under chapter 15 as a foreign main proceeding. Recognition would require establishing that the Debtor’s center of main interests (COMI) is located in the Cayman Islands, even though its “nerve center” was in China. The Court observed that existing precedent in the Southern District of New York would support a Cayman Islands COMI finding only if the Debtor obtained overwhelming creditor support and no party objected to recognition. Notably, the Court indicated that recognition as a foreign non-main proceeding would “almost certainly not be possible” because the Debtor conducts no significant business operations in the Cayman Islands.

Importantly, the Court reasoned that allowing the chapter 11 case to proceed could actually benefit creditors by providing leverage to break the impasse in the Cayman Islands restructuring. Unlike Cayman Islands law, which requires debtor support for a creditor plan, chapter 11 permits creditors to file their own plan of reorganization if the debtor fails to make progress, providing a mechanism to advance negotiations.[1]

Dismissal for cause

Xinyuan argued that the involuntary petition was filed for an improper purpose – namely, to gain a tactical advantage in restructuring negotiations – and should be dismissed for cause. The Court rejected this argument, finding no evidence of an improper motive. In addition, the Court emphasized that the circumstances here were different from the typical fact pattern justifying dismissal, where “an arrangement is being worked out by creditors and the debtor out of court...and an involuntary case has been commenced by a few recalcitrant creditors to provide a basis for future threats to extract full payment.” The scheme was not an out-of-court arrangement, and the petitioning creditors filed under chapter 11, which ensures that all members of a class receive uniform treatment rather than preferential treatment.

Forum non conveniens

The Court found that New York was not an inconvenient forum since Xinyuan had agreed to New York forum selection clauses in the relevant debt documents, which undermined its argument that the Cayman Islands was a more appropriate forum.

Practical implications

Forum selection clauses matter. Offshore holding companies that have contractually agreed to US forum selection clauses may find it difficult to avoid US bankruptcy proceedings, even when pursuing restructurings in their jurisdiction of incorporation. The Court gave significant weight to the forum selection clauses in the debt instruments, suggesting that such provisions will be enforced to permit creditors to pursue remedies in US courts, including involuntary bankruptcy filings.

Progress in the foreign proceeding is significant. Debtors seeking abstention in favor of foreign proceedings must demonstrate meaningful progress in those proceedings. Stalled foreign cases with insufficient creditor support will not provide a basis for US courts to abstain. In Xinyuan, the Court left the door open for the Debtor to renew its abstention motion if circumstances change – specifically, if meaningful progress is made in the Cayman Islands restructuring. Abstention determinations are thus fact-specific and may evolve as proceedings develop.

Chapter 11 may provide leverage. The ability of creditors to file competing plans under chapter 11 may be viewed as a benefit rather than a drawback, particularly in cases where restructuring negotiations have reached an impasse. The Court specifically noted that, under Section 1121 of the Bankruptcy Code, the debtor’s exclusive right to file a plan expires if it fails to file a plan within 120 days and to obtain acceptances within 180 days, with the Court having power to either extend or shorten these periods. These provisions “effectively put pressure on debtors to reorganize without undue delay,” and the Court observed that “the mere possibility of an eventual creditor plan can affect the negotiating dynamics from day one of the case.” The Court suggested that this change in the rules and its denial of the motion to dismiss could potentially break the current impasse in scheme negotiations.

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