Vol 8 (2011) - Issue 2

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Assistance for Foreign Representatives

Liquidators are often faced with realising assets that are located in jurisdictions in which their appointment is not recognised and/or their powers are limited. William Tacon and Richard Fogerty of Zolfo Cooper (formerly Kroll) faced this issue when they were appointed Joint Official Liquidators of Condor Insurance Limited (Condor), by Order of the Eastern Caribbean Supreme Court in the High Court of Justice, Nevis Circuit, on 18 May 2007 (the Foreign Proceeding).

Together with similar foreign laws, chapter 15 of the US Bankruptcy Code is intended to create a uniform system for recognition of foreign insolvency proceedings and co-operation of courts and administrators in insolvencies involving debtors that have assets in multiple jurisdictions. Section 1501 of the US Bankruptcy Code explains that the purpose of chapter 15 is to promote ‘greater legal certainty’ and to provide a 'fair and efficient administration of cross-border insolvencies that protects the interests of all creditors'. A foreign representative initiates a chapter 15 proceeding by filing an application for recognition. On recognition of a foreign proceeding, chapter 15 allows a bankruptcy court to grant, with certain specified exceptions, '[a]ny … relief that may be available to a trustee' under the US Bankruptcy Code.

Richard Fogerty and William Tacon are accustomed to dealing with companies that have cross-border operations and therefore, given that Condor’s assets were predominantly held in the US, they recognised the importance of obtaining recognition of the Foreign Proceeding in the US. Following advice from their counsel, Baker & McKenzie LLP, the liquidators filed a chapter 15 petition commencing a chapter 15 case ancillary to the Foreign Proceeding and seeking recognition of the Foreign Proceeding as a 'foreign main proceeding', as defined in section 1502(4) of the US Bankruptcy Code.

In August 2007, the United States Bankruptcy Court for the Southern District of Mississippi (the Bankruptcy Court) ordered that the Foreign Proceeding be granted recognition as a foreign main proceeding.

Whilst recognition was obtained in respect of the Condor matter and other cases such as SPhinx Limited, Trade and Commerce Bank and BanCredit Cayman Limited, it is important to note that chapter 15 relief is not available to all offshore entities. Bankruptcy Judge Burton R. Lifland’s decision to deny chapter 15 relief to two Cayman-incorporated hedge funds which were managed in the United States by Bear Stearns was extensively reported on. According to that decision, where an offshore entity does not have a true business 'establishment' in its state of incorporation but files an insolvency proceeding there, a US bankruptcy court has no discretion i.e. it cannot recognise the foreign proceeding as either a 'foreign main proceeding' or a 'foreign non-main proceeding'. The decision drew on the plain language of section 1502(5) of the US Bankruptcy Code which authorises chapter 15 relief only if the foreign proceeding is pending where the debtor has an 'establishment'.

Although the Bear Stearns decision appeared to make it harder for foreign representatives to obtain chapter 15 relief, that ruling may be limited to the specific facts of that matter. Perhaps a slightly greater business presence in the country of incorporation could have changed the resultant ruling. This position was supported when the United States Bankruptcy Court for the Southern District of New York (the NY Bankruptcy Court) ruled in favour of a petition filed by the liquidators’ of Fairfield Sentry Ltd which was seeking recognition of the fund’s British Virgin Islands-based insolvency proceedings. The Fairfield ruling appears to lessen the evidentiary burden imposed by cases such as Bear Stearns and allows greater reliance on the presumption that an entity’s centre of main interests (COMI) will be deemed to be the location of the entity’s registered office.

In October 2007, following a Motion filed by the Liquidators, the Bankruptcy Court, relying on the broad discretion to grant '[a]ny … relief that might be available to a trustee' ordered that section 108 of the Bankruptcy Code be applied to the Condor chapter 15 proceeding. This section 108 relief was important to the Liquidators as it provided more protection to the estate by allowing the Liquidators to initiate claims for an extended/defined period of time.