Transferring the center of main interests shortly before bankruptcy to a foreign jurisdiction that allows reorganization does not preclude chapter 15 recognition of a foreign main proceeding in the new jurisdiction, according to Bankruptcy Judge Martin Glenn of Manhattan.
The holding company for subsidiaries that own offshore drilling rigs had been domiciled in the Republic of the Marshall Islands until April 2016, when it registered as a so-called exempt company in the Cayman Islands. Because it was facing an impending default on bonds, Judge Glenn said the company “acted prudently” by exploring restructuring proceedings in the Caymans.
The company made the shift to the Caymans, Judge Glenn said, because liquidation was the only possibility in the Marshalls. Law in the Caymans allows a scheme of arrangement to avoid liquidation.
At the same time in April 2016, Judge Glenn said the parent switched its center of main interests to the Caymans.
Three direct subsidiaries of the holding company owned the operating assets through their non-debtor subsidiaries. The three retained their non-resident domicile in the Marshalls but registered in the Caymans as foreign companies. They too moved their center of main interests to the Caymans in April 2016.
The holding company and the three direct subsidiaries initiated winding-up proceedings in the Caymans in late March 2017 and proposed a scheme of arrangement scheduled for approval (or sanction) in the Caymans court in September. The four companies filed chapter 15 petitions in New York on the same day in late March and sought recognition of the Caymans proceedings as the foreign main proceedings.
In his Aug. 24 opinion, Judge Glenn framed the question as being whether switching the center of main interests, to avoid liquidation, satisfies the requirements of chapter 15.
The center of main interests is determined as of the filing date, Judge Glenn said. Since the center of main interests shifted, Judge Glenn conducted “a more holistic analysis to ensure that the debtor has not manipulated COMI in bad faith.”
Reviewing the facts, Judge Glenn said he had “no difficulty” in finding that the debtors’ center of main interests was in the Caymans. Granting foreign main recognition, he said that shifting the center of main interests “was done for a proper purpose to facilitate a value-maximizing restructuring.”
Judge Glenn said the companies had a “legitimate, good faith purpose for shifting” from the Marshalls to the Caymans, because proceedings in the Marshalls “would invariably result in a value-destroying liquidation process.”