Funds' assets in the U.S. has been denied by the United States Bankruptcy Court for the Southern District of New York. See 2007 Bankr. LEXIS 2949, *26 (Bankr. S.D.N.Y. Aug. 30 , 2007). The Funds were being liquidated in the Cayman Islands, but the bankruptcy court held that they were not eligible for Chapter 15 relief under the U.S. Bankruptcy Code (the "Code") because the liquidations were not pending in a country where the Funds had their "center of main interests" or an "establishment" for the conduct of business.

Chapter 15 of the Code: Protection of Foreign Debtor's Assets in the U.S. Congress enacted Chapter 15 of the Code in 2005 to "provide effective mechanisms for dealing with cases of cross-border insolvency." 11 U.S.C. § 1501(a). A Chapter 15 case is commenced by the filing of a petition, with supporting evidentiary documents,1 in a U.S. bankruptcy court by the debtor's foreign representative, seeking recognition of the debtor's foreign insolvency proceeding. See 2007 Bankr. LEXIS 2949, at *11. The court may grant Chapter 15 relief (e.g., enjoin suits, foreclosures) only if it recognizes the foreign proceeding as a "main" or "non-main" proceeding. Alternatively, it may deny Chapter 15 relief by refusing to recognize the foreign proceeding. Id

A foreign "main" proceeding is "a foreign proceeding pending in the country where the debtor has the center of its main interests." 11 U.S.C. § 1502(4). In the absence of evidence to the contrary, the debtor's registered office is presumed to be the center of its main interests. 11 U.S.C. § 1516(c). A "non-main" proceeding is any other proceeding "pending in a country where the debtor has an establishment" to carry out "a nontransitory economic activity" (i.e., where it has a local place of business). 11 U.S.C. § 1502(2), (5)


Each of the Funds in the recent case is a Cayman Islands exempted limited liability company with a registered office in the Cayman Islands. Their administrator is a Massachusetts company that maintains the Funds' books and records in Delaware. Id. at *3. The Funds investment manager is a New York corporation that manages the Funds' assets in the Southern District of New York. Id. at *4. Other assets of the Funds consist of receivables from broker-dealers, virtually all of which are located in the Southern District of New York. The Funds' investor registers are held in Dublin, Ireland. Id.

The Funds' directors authorized them to seek a "winding up" in the Cayman Islands. Id. at *5. Shortly after the Cayman proceedings were commenced, the liquidators appointed by the Cayman court asked the U.S. bankruptcy court to recognize the Cayman liquidation proceedings as main, or, alternatively, as non-main proceedings under Code Chapter 15—a prerequisite to obtaining an injunction protecting the Funds' U.S. assets. Id. at *1–2. No party objected, although the bankruptcy court did treat one entity's "ambiguous statement" in response to the petitions as a partial objection.


According to the bankruptcy court, while Chapter 15 grants courts "substantial discretion and flexibility," the process of recognizing a foreign proceeding is "a simple single step process": Is the foreign proceeding "main" or "non-main"? Id. at *9. Applying the statutory definitions, the court refused to recognize the Cayman Islands proceedings as either main or non-main proceedings.

A. Not a Foreign Main Proceeding

The court relied on facts showing that each Fund's "center of main interest" was in the United States, not the Cayman Islands. Id. at *18-19 ("the only adhesive connection with the Cayman Islands that the Funds have is . . . that they are registered there"). Specifically, the court noted that:

  • there are no employees or managers in the Cayman Islands;
  • the investment manager for the Funds is located in New York;
  • the Funds' administrator is in the U.S., along with the Funds' books and records;
  • prior to the commencement of the Cayman liquidation proceeding, all of the Funds' liquid assets were in the U.S;
  • although two of the three investors in one of the Funds are also registered Cayman Islands companies, they have the same minimum Cayman Islands profile as the Funds, and the sole investor in the other Fund is a U.K. entity;
  • the investor registries are maintained and located in Ireland;
  • counterparties to the Funds' master repurchase and swap agreements are based both inside and outside the U.S., but none are in the Cayman Islands; and
  • pre-bankruptcy transactions in the U.S. may be voidable under U.S. law. Id. at 19.

In refusing recognition, the court disagreed with dicta in another recent Chapter 15 recognition decision, In re SPhinX, Ltd., 351 B.R.103 (Bankr. S.D.N.Y. 2006), aff'd, 2007 WL 1965597 (S.D.N.Y. July 3, 2007),.The SPhinX court stated "that if the parties in interest had not objected to the Cayman Islands proceeding being recognized as main, recognition would have been granted under the sole grounds that no party objected and no other proceeding had been initiated anywhere else." 2007 Bankr. LEXIS 2949, at *21. Here, the court rejected the SPhinX approach, reasoning that recognition premised on a party's failure to object "would make the recognition process a rubber stamp exercise." Id

B. Not a Foreign Non-Main Proceeding

According to the bankruptcy court, the Cayman liquidators had to show an "establishment" in the foreign jurisdiction for the conduct of "nontransitory economic activity." Id. at 23 (emphasis in original). The Cayman Islands statute, however, prohibited "'exempted companies' [from] engaging in business in the Cayman Islands except in furtherance of their business otherwise carried on outside of the Cayman Islands." Id. (emphasis in original). Denying non-main recognition, the court noted that the Funds conducted "no (pertinent) nontransitory economic activity" in the Cayman Islands. Their business was conducted offshore. Id. Further, the only cash account funds on deposit in the Cayman Islands migrated there after commencement of the Cayman Islands proceedings. Id.

C. Alternative U.S. Bankruptcy Relief Available to Funds

In the court's view, the Funds might still be able to seek alternative bankruptcy relief from the U.S. courts. Bankruptcy Code section 303(b)(4), which does not require recognition of a foreign proceeding, "specifically provides that an involuntary case may be commenced under chapter 7 or 11 of the Bankruptcy Code by a foreign representative of the estate in a foreign proceeding." Id. at 27. "[T]his flexibility leaves open the potential coordination of a [bankruptcy] case filed [in the U.S.] with the Foreign Proceeding." Id.

D. Appeal Pending

The liquidators of the Funds appealed from the bankruptcy court's decision on Sept. 10, 2007.