Chapter 15 relief isn’t automatic just because someone is called a “joint provisional liquidator” in the Cayman Islands, as explained in an opinion by Bankruptcy Judge David S. Jones of New York.
Or, as Judge Jones said in his December 5 opinion, liquidators are not entitled to chapter 15 recognition if the foreign proceeding does not involve adjusting debts but “instead serves the current purpose of investigating suspected misconduct, and locating and recovering corporate assets.”
Judge Jones denied foreign main recognition without prejudice, to forestall foreign representatives from filing chapter 15 petitions when there are “proceedings in its home jurisdiction seeking to install new fiduciaries and right the wrong that the corporation has suffered.”
The Chinese Company
The company was a so-called exempted company registered in the Cayman Islands. It operated primarily in China and was headquartered in Hong Kong. Shares were traded in the U.S.
A significant shareholder filed a winding-up petition in the Caymans to challenge a transaction that allegedly diluted the company’s stock “radically” and transferred $600 million out of the company. The court in the Caymans appointed joint provisional liquidators, or JPLs.
The Caymans appointment order, according to Judge Jones, authorized the JPLs to protect, preserve and take possession of company assets and to investigate and report. The order suspended the powers of the board and authorized the JPLs to commence winding-up or insolvency proceedings in the Caymans or elsewhere.
According to the record in bankruptcy court, Judge Jones said that “no such winding up proceeding has begun.”
Judge Jones identified the provisions in the Caymans Companies Act under which the JPLs were appointed. The petition for appointment of the liquidators was filed under two provisions of the Companies Act, permitting the appointment of JPLs to prevent dissipation of company assets. The particular provisions do not require a showing of insolvency, nor do they provide for the adjustment of debt.
Two different provisions in the Companies Act allow appointment of JPLs if the company is or may become insolvent.
Soon after their appointment in the Caymans, the JPLs filed a chapter 15 petition in New York seeking recognition of the proceedings in the Caymans as a foreign main proceeding. In the petition, the JPLs said they would seek authority to take discovery.
A group of ousted directors and an owner of the company filed objections to recognition. They argued that the proceedings in the Caymans did not represent a “foreign proceeding” as defined in Section 101(23). They prevailed.
The Definition of ‘Foreign Proceeding’
Section 101(23) defines a “foreign proceeding” as
a collective judicial or administrative proceeding in a foreign country . . . under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
Citing authorities, Judge Jones said there are seven elements in the definition of a foreign proceeding. Four were satisfied, he said, but the JPLs allegedly did not comply with three: (1) Was it a “collective proceeding (2) under a law “relating to insolvency or adjustment of debt” that (3) was “for the purpose of reorganization or liquidation”?
Collective Proceeding
Judge Jones ruled that it was not a collective proceeding because creditors had not been given notice, and there were no plans to identify creditors or decide how to satisfy their claims. Furthermore, no winding-up had begun, although the JPLs were authorized to do so if they deemed it appropriate.
The JPLs contended that the proceedings were collective because they sought to benefit the corporation and all constituencies. Furthermore, they hoped the company would remain solvent and pay all creditors.
Although the argument was “logical,” Judge Jones declined to adopt it. “As of now,” he said, “there is nothing about the Cayman Proceeding that is specifically oriented toward creditors.”
To Judges Jones, it was “clear that the Cayman Proceeding does not involve all the hallmarks of ‘collective’ proceedings envisioned.” He held that it was not a foreign proceeding and denied recognition on that basis.
A Law Relating to Insolvency
On the other hand, Judge Jones said the Caymans proceedings were under a law “relating to insolvency or adjustment of debt,” because the test is not whether the pending proceedings themselves concern insolvency.
The proceedings were being brought under a law that relates to insolvency and thus “meets this aspect of the section 101(23) test for foreign proceedings,” Judge Jones found.
For the Purpose of Liquidation or Reorganization
On the third element, Judge Jones observed that the order appointing the JPLs did “not confer powers of reorganization.” Instead, the JPLs were appointed to preserve the assets and investigate. Significantly, no winding-up had begun in the Caymans.
The “possibility that a liquidation or reorganization may be necessary in the future” was not enough, according to Judge Jones. He concluded
that where, as here, the JPLs aver that they hope never to need to liquidate the company or even its assets, the mere possibility that a liquidation could occur down the road is not sufficient to make the “purpose” of the Cayman Proceeding the “liquidation” of the corporation or its affairs.
Because the proceedings in the Caymans did not meet the definition, Judge Jones denied the petition for recognition “without prejudice to future applications by the JPLs or other authorized representatives, if warranted by future developments in the Cayman Proceeding or elsewhere.”
Observations
Contrast the opinion by Judge Jones to In re Modern Land (China) Co., Ltd., 641 B.R. 768, 784 (Bankr. S.D.N.Y. July 18, 2022).
In Modern Land, Judge Jones’ colleague on the New York bench, Martin Glenn, granted foreign main recognition to proceedings in the Cayman Islands, even though the company’s assets, management and business were in mainland China. In Modern Land, however, there was debt governed by New York law. Furthermore, the creditors were almost unanimous in their approval of a scheme of arrangement approved in the Caymans, and no creditor objected to recognition in the U.S. To read ABI’s report on Modern Land, click here.
Were the results different in the two cases because Judge Jones had objections when Judge Glenn had none?
Judge Jones’ opinion seems more in line with an opinion by Bankruptcy Judge Janice D. Loyd of Oklahoma City in In re Comfort Jet Aviation Ltd., 22-10039, 2022 BL 369208 (Bankr. W.D. Okla. Oct. 14, 2022).
In Comfort Jet, Judge Loyd declined to recognize the Isle of Man liquidation of a “letter box” company with no operations, assets or actual management on the Isle of Man. She ruled that the foreign representative was not entitled to either foreign main or foreign nonmain recognition under chapter 15, because the island was not the center of main interests, nor did the company have an “establishment” there.
In Comfort Jet, there were objections to recognition. To read ABI’s report on Comfort Jet, click here.
Do we distill from the three cases that recognition in a dubious case can be granted if there are no objections, or were Judges Jones and Loyd applying the law more strictly?
Chapter 15 relief isn’t automatic just because someone is called a “joint provisional liquidator” in the Cayman Islands, as explained in an opinion by Bankruptcy Judge David S. Jones of New York.
Or, as Judge Jones said in his December 5 opinion, liquidators are not entitled to chapter 15 recognition if the foreign proceeding does not involve adjusting debts but “instead serves the current purpose of investigating suspected misconduct, and locating and recovering corporate assets.”
Judge Jones denied foreign main recognition without prejudice, to forestall foreign representatives from filing chapter 15 petitions when there are “proceedings in its home jurisdiction seeking to install new fiduciaries and right the wrong that the corporation has suffered.”