Vol 12 (2015) - Issue 1

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US Court and Cayman Islands Court: Sharing Jurisdiction in the Interests of Comity

In re: Soundview Elite, Ltd., et al., Debtors (Case No. 13- 13098 (REG)) the United States Bankruptcy Court Southern District of New York had to consider, among other things, the question of whether the automatic stay under the United States Bankruptcy Code (the 'Code') applied in the case of three affiliated Cayman Islands domiciled investment funds (the 'Cayman funds') managed by an affiliate of New York based fund manager, Fletcher Asset Management Inc. The Cayman funds were placed into liquidation in the Cayman Islands on the same day that they filed bankruptcy proceedings under Chapter 11 of the Code ('Chapter 11') in New York.

Background
The Cayman funds were registered with and regulated by the Cayman Islands Monetary Authority ('CIMA'). Winding up petitions (the 'Cayman Petitions') were filed against the Cayman funds in the Grand Court of the Cayman Islands in August 2013 by investor members of the Cayman funds (the 'Redeemers'). The Redeemers asserted, among other things, that pursuant to section 92(d) of the Cayman Islands Companies Law, the Cayman funds were unable to pay their debts (which were in the nature of unpaid redemption amounts). A hearing of the Cayman Petitions in the Grand Court of the Cayman Islands was scheduled for later in the year (the 'Hearing Date'). On the Hearing Date but, crucially, before the time of the scheduled hearing before the Grand Court, the Cayman funds filed bankruptcy proceedings under Chapter 11 in New York. The Judge in the Grand Court hearing was informed that the filing of the Chapter 11 petitions had happened earlier that same day but appeared to have been given little knowledge of the details of the Chapter 11 filings. The Judge in the Grand Court hearing ordered the winding up of the Cayman funds and the appointment of Joint Official Liquidators ('JOLs') with respect to each of the Cayman funds. The Cayman Petitions were supported by CIMA.
Accordingly, the JOLs had been appointed over the affairs of the Cayman funds in the Cayman Islands whilst under the Chapter 11 proceedings in New York each of the Cayman funds remained in control of its business operations as a debtor in possession subject to the oversight and jurisdiction of the New York Court. Effectively the incumbent board of directors of each of the Cayman funds was still in charge of the relevant Cayman fund's affairs as far as US federal bankruptcy law was concerned. The JOLs filed motions in New York to dismiss the Chapter 11 proceedings in favour of liquidation proceedings in the Cayman Islands.

Analysis
Under section 362 of the Code, immediately upon the filing of the Cayman funds' Chapter 11 petitions an automatic stay of proceedings against the Cayman funds became effective. The United States Bankruptcy Judge (the 'US Judge') in the Chapter 11 proceedings was tasked with dealing 'with the overlapping, and in some respects conflicting, jurisdiction of the U.S. and Cayman Courts, with due regard for the comity that each court should provide the other'. The US Judge had to determine, among other things, if the Chapter 11 filings by the Cayman funds were commenced validly and whether or not the automatic stay under section 362 of the Code applied in this case. The JOLs had filed a motion for the US Judge to grant relief from the stay in order to allow the Cayman liquidation proceedings to go ahead.