Bankruptcy Judge Philip Bentley of New York drew a roadmap describing how large companies operating in mainland China can obtain so-called foreign main recognition in a chapter 15 case in New York by having schemes of arrangement “sanctioned” by a court in Hong Kong.
Notably, the desired outcome may depend on whether anyone objects and whether creditors overwhelmingly endorse the Hong Kong scheme.
Prof. Jay L. Westbrook told ABI that “Judge Bentley in general has written a thoughtful and useful opinion avoiding the rubber stamp too often seen in recognition cases. Yet, it raises a concern I have about all the ‘no objection’ cases.”
The Holding Company Debtor
Incorporated in the Cayman Islands, the debtor was a “pure” holding company for a large property developer with billions of dollars of assets in mainland China. As Judge Bentley said in his January 30 opinion, the debtor itself had few assets and no operations in Hong Kong. However, the debtor claimed to be headquartered in Hong Kong, and its stock was traded on the Hong Kong Stock Exchange.
Aside from the chief financial officer, “almost all” of the debtor’s senior management were located on the mainland, Judge Bentley said.
The debtor ran into financial difficulty, and its subsidiaries defaulted on debt that was principally raised on the mainland and denominated in Chinese currency. The debtor, however, had no Chinese-denominated debt. Rather, it had about $9 billion in unsecured debt, including almost $8 billion governed by New York law and about $1 billion governed by Hong Kong law.
The debtor negotiated a restructuring support agreement endorsed by holders of 85% of the $9 billion in debt. The Hong Kong court approved the debtor’s scheme of arrangement by the required super majorities. The same day, the debtor filed a chapter 15 petition in New York and sought approval of the Hong Kong proceedings as a foreign main proceeding.
There were no objections to foreign main recognition, but Judge Bentley conducted his own independent analysis.
Hong Kong Is the COMI
Section 1502(4) declares that “‘foreign main proceeding’ means a foreign proceeding pending in the country where the debtor has the center of its main interests.” In the Second Circuit, COMI was principally defined in Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013). The appeals court said that COMI must be determined at the time of the chapter 15 filing and laid out factors to decide “whether the registered-office presumption has been overcome.”
In the case before him, Judge Bentley said that “the Debtor conducts no business in the Caymans, has no assets or creditors there, and has no offices there except a ‘mail-drop’ address. In addition, the Debtor chose not to restructure in the Cayman Islands — a potentially dispositive consideration in this circuit.”
With the COMI not in the Cayman Islands, Judge Bentley said that the question was whether mainland China or Hong Kong was the COMI. Quoting Fairfield Sentry, id at 130, he said that “‘COMI lies where the debtor conducts its regular business, so that the place is ascertainable by third parties.’”
Analyzing the facts, Judge Bentley observed that the debtor had “no real headquarters” but only a mail drop in Hong Kong. However, he said that headquarters can also mean “nerve center.”
“In this case,” Judge Bentley said, “Hong Kong has always been the center of the Debtor’s business activities and decision-making,” pointing toward COMI in Hong Kong.
Judge Bentley discounted the fact that all corporate officers other than the CFO were on the mainland. Instead, he looked to where they made their decisions in the restructuring and concluded that “Hong Kong has always been the locus of the Debtor’s activities and decision-making.”
The debtor’s most valuable assets, the subsidiaries, “should be deemed located [on the mainland], weighing in favor of a [mainland] COMI finding,” Judge Bentley said.
The jurisdiction whose laws apply to most disputes is a factor. Although New York law governed $8 billion of the debt, Judge Bentley said that the $1 billion under Hong Kong law had “outsized significance” since Hong Kong law follows the so-called Gibbs rule, which says that Hong Kong debt may be restructured only in Hong Kong.
Were the restructuring on the mainland, Judge Bentley said there would have been a parallel proceeding in Hong Kong. “This factor,” he said, “weighs in favor of Hong Kong as the COMI.”
Judge Bentley said that the debtor’s primary business activity was the “restructuring,” which was led by the CFO, who resided in Hong Kong. He thus concluded that “there is little question that Hong Kong is the Debtor’s COMI.”
With regard to creditors’ expectations, Judge Bentley said there was “little reason” for creditors to expect a restructuring in Hong Kong, but “less reason to expect a restructuring [on the mainland].”
“Given that the COMI choice in this case is not between Hong Kong and the Cayman Islands but instead between Hong Kong and the [mainland], this expectation weighs in favor of a Hong Kong COMI,” Judge Bentley said.
Judge Bentley also gave “significant weight” to creditors’ support for the restructuring, “particularly if no creditor objects to the debtor’s choice of restructuring forum.” He ruled that “the Debtor is entitled to recognition of the Hong Kong proceeding as a foreign main proceeding.”
Commentary by Prof. Westbrook
Prof. Westbrook, one of the drafters of chapter 15, told ABI, “I welcome the independent examination that the court provides in this case, but I worry that the opinion does not discuss a number of other factors that a COMI analysis should include.”
Prof. Westbrook explained:
Because of the lack of an objection, there are a number of important facts about the case we aren’t told. For example, given that the Hong Kong debtor had no real, economic existence, and if no guarantees were provided by the asset-rich subsidiaries on the mainland, did the guaranteeing subsidiaries have any accessible assets? If so, were those subsidiaries released? If yes, then the case looks somewhat like In re Vitro S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012); if not, then the creditors took their chances lending it $9 billion unsecured.
“As to the fact of no objection,” Prof. Westbrook said, “there likely was resistance from creditors because the chapter 15 case would probably not have been brought if all the creditors were on board.
“As with other no-objection cases,” Prof. Westbrook said, “the nondiscussion of these sorts of facts should make later courts hesitant to draw too many binding precedential conclusions despite the fine analysis.”
Prof. Westbrook occupies the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law and is the country’s leading expert on cross-border insolvency.
Bankruptcy Judge Philip Bentley of New York drew a roadmap describing how large companies operating in mainland China can obtain so-called foreign main recognition in a chapter 15 case in New York by having schemes of arrangement “sanctioned” by a court in Hong Kong.
Notably, the desired outcome may depend on whether anyone objects and whether creditors overwhelmingly endorse the Hong Kong scheme.
Prof. Jay L. Westbrook told ABI that “Judge Bentley in general has written a thoughtful and useful opinion avoiding the rubber stamp too often seen in recognition cases. Yet, it raises a concern I have about all the ‘no objection’ cases.”