The Modern Land opinion on July 18 by Bankruptcy Judge Martin Glenn of New York appears to mean that the Cayman Islands can be the center of main interests for the purpose of chapter 15 foreign main recognition even though the company’s assets, management and business are in mainland China, in the absence of an objection by an affected creditor.
“With great respect,” Prof. Jay L. Westbrook said, “I disagree with the approach in Modern Land, where the foreign note holders of a [mainland Chinese] company had their rights substantially altered by an insolvency proceeding in a haven jurisdiction.” Prof. Westbrook is the country’s leading authority on cross-border insolvency and occupies the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law.
Extension of Fairfield Sentry
Judge Glenn’s opinion could be seen as an extension of Second Circuit authority holding that the center of main interests, or COMI, can shift to the Caymans as a consequence of substantial activities by liquidators appointed by the court in the Caymans. See Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013).
The Modern Land chapter 15 case before Judge Glenn did not involve the culmination of a liquidation conducted in the Caymans, as was the case in Fairfield Sentry. Rather, Modern Land dealt with a scheme of arrangement presumably negotiated elsewhere and then approved by a court in the Caymans.
The opinion by Judge Glenn recognizes the policy of chapter 15 to fulfill the expectations of creditors. But does policy allow the court to override the language of the statute, which precludes the finding of COMI where the company never operated?
Laudably, Judge Glenn’s opinion corrects a Hong Kong court’s misinterpretation of a significant chapter 15 decision from the Southern District of New York dealing with a different issue.
The COMI Issue
Judge Glenn’s opinion is required reading for anyone who may ever participate in a chapter 15 case.
Incorporated in the Caymans, the debtor was the ultimate parent of subsidiaries that were property developers in mainland China. Half of the subsidiaries were also incorporated in the Caymans, and they maintained their registered offices in the Caymans. The debtor’s stock was listed on the Hong Kong Stock Exchange.
Judge Glenn said it was “undisputed” that the debtor and its subsidiaries “managed and conducted their business” in mainland China.
The total debt was some $4.3 billion, including about $1.3 billion in notes governed by New York law. The notes were in default.
The debtor negotiated a scheme of arrangement to be implemented under Caymans law in a court in the Caymans. The scheme was accepted by 99% in number and 95% in amount of notes voting in an arrangement proceeding in the Caymans. No other creditors were to be affected by the scheme.
The scheme was designed to extinguish existing notes. In exchange, the holders were to receive some cash and new notes. The court in the Caymans approved the scheme. The company continued to operate throughout and was not being liquidated.
The debtor’s foreign representative filed a chapter 15 petition in New York asking for recognition of the proceedings in the Caymans as the foreign main proceeding under Section 1517(a)(1). Under Section 1502(4), Judge Glenn would find the Caymans to be the host of the “foreign main proceeding” if he were to find that the Caymans was “the country where the debtor has the center of its main interests.”
“In the absence of evidence to the contrary,” Section 1516(c) provides that “the debtor’s registered office . . . is presumed to be the center of the debtor’s main interests.” To decide whether the COMI presumption has been overcome, Judge Glenn said that courts consider factors such as the location of the debtor’s headquarters, the location of individuals who actually manage the business and the location of the primary assets.
Judge Glenn said that the Second Circuit “and other courts often examine” whether the COMI “would have been ascertainable to interested third parties.”
Judge Glenn cited Fairfield Sentry and In re Suntech Power Holdings Co., 520 B.R. 399 (Bankr. S.D.N.Y. 2014), for the proposition that COMI is determined as of the date of the filing of the chapter 15 petition, not necessarily the location from which activities were conducted historically. Thus, substantial activities by foreign liquidators can have the effect of moving the COMI to the Caymans from the country where the business was conducted historically.
In the case before him, there were no liquidators because the debtor was in arrangement proceedings. “So,” Judge Glenn said, “the question is whether the absence of court-supervised fiduciaries, such as [liquidators], requires a different result in finding COMI in the Cayman Islands in this case given that no [liquidators] were appointed.”
The two creditors who voted against the scheme in the Caymans did not oppose finding the Caymans to be the COMI.
It’s Main, but Can’t Be Nonmain
Judge Glenn explained in detail why the Caymans was not hosting a foreign nonmain proceeding.
Section 1502(5) says that a foreign proceeding is nonmain if it is “pending in a country where the debtor has an establishment.” In turn, “an establishment” is defined in Section 1502(2) to be “any place of operations where the debtor carries out a nontransitory economic activity.”
The debtor conducted no “nontransitory” business in the Caymans. Prof. Westbrook therefore said, “The court was quite right in finding that the Cayman’s proceeding could not be classified as nonmain under Chapter 15 because there was no real economic activity there.”
“Mere paper shuffling or a director’s weekend on a sun-kissed island should not be enough,” the professor added.
Although the Caymans could not conduct a nonmain proceeding, Judge Glenn cited several reasons why the Caymans nonetheless could be the COMI, and thus home to a foreign main proceeding. Among other considerations, he cited the “goals” of chapter 15, the creditors’ expectations and the prevalent judicial role of the court in the Caymans.
In other words, Judge Glenn held that a country that couldn’t host a nonmain proceeding nevertheless could be the COMI and expect countries around the world to enforce its decisions.
Discharging Debt in Chapter 15
Judge Glenn opined on the proper interpretation of In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018). Agrokor was an opinion by Judge Glenn where he recognized a Croatian plan “in full within the territorial jurisdiction of the U.S., including the provisions modifying the English law governed debt and the New York law governed debt.” Id. at 191-192. To read ABI’s report on Agrokor, click here.
In June, a court in Hong Kong evidently interpreted Agrokor to mean that foreign main recognition under chapter 15 does not discharge debt in the U.S.
“With great respect for the Hong Kong court,” Judge Glenn said, the “court misinterprets this Court’s earlier decision in Agrokor, as well as many other decisions in the United States which have recognized and enforced foreign court sanctioned schemes or restructuring plans that have modified or discharged New York law governed debt.”
Assuming that factual and procedural prerequisites are met, Judge Glenn said that “a decision of the foreign court approving a scheme or plan that modifies or discharges New York law governed debt is enforceable” in the U.S. by virtue of a chapter 15 case in the U.S.
Identifying the mistaken interpretation by the Hong Kong court, he said that the geographical “limits [of] a U.S. bankruptcy court’s authority to enjoin conduct outside the territorial jurisdiction of the United States [under chapter 15] does not make a discharge of New York law governed debt any less controlling.”
Even if a Hong Kong court were to believe that the proceedings in New York did not discharge the debt under the “old” notes, Judge Glenn was saying that the discharge would be enforceable in the territorial U.S.
Judge Glenn recognized the Caymans proceedings as the foreign main proceeding and enforced the scheme of arrangement in the U.S. that had been approved by the court in the Caymans.
Of note, the debtor said it did not intend to have a court in Hong Kong rule that the debt on the “old” notes was discharged. As a result, the obligations on the “old” notes would be discharged in the U.S. as a consequence of foreign main recognition but not discharged in Hong Kong, where the debtor’s stock was traded and where the company operated.
Commentary by Prof. Westbrook
Prof. Westbrook believes that “the court was mistaken in its second finding that mere incorporation in the jurisdiction was sufficient to make the proceeding a main one. That combination of findings turns the structure of the Model Law upside down, with the standard for a main proceeding requiring less real economic contact with a jurisdiction than the nonmain standard.”
Regarding the finding of COMI, Prof. Westbrook added:
The result is especially troubling if the noteholders were protected by the Trust Indenture Act and the choice of New York law. While a foreign insolvency proceeding can stand in for a U.S. bankruptcy as an exception to the TIA protections, only a true main proceeding in the debtor’s COMI should be permitted to have that effect.
Where there is no meaningful economic activity in the rendering jurisdiction, how can it be “the center” of its business as Chapter 15 (and the Model Law) require? My touchstone is the seminal opinion by the late Judge Burton R. Lifland, In re Bear Stearns High-Grade Structured Credit Strategies, 374 B.R. 122 (Bankr. S.D.N.Y 2007).
The Modern Land opinion on July 18 by Bankruptcy Judge Martin Glenn of New York appears to mean that the Cayman Islands can be the center of main interests for the purpose of chapter 15 foreign main recognition even though the company’s assets, management and business are in mainland China, in the absence of an objection by an affected creditor.
“With great respect,” Prof. Jay L. Westbrook said, “I disagree with the approach in Modern Land, where the foreign note holders of a [mainland Chinese] company had their rights substantially altered by an insolvency proceeding in a haven jurisdiction.” Prof. Westbrook is the country’s leading authority on cross-border insolvency and occupies the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law.