The United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) recently ordered the appointment of a Chapter 11 Trustee to manage the business affairs of sixteen entities in the China Fishery Group (the “CFG Debtors”) in In re China Fishery Group Limited (Cayman). The CFG Debtors are part of the Pacific Andes Group, a conglomerate of over 150 entities owned by the Ng family of Hong Kong, which collectively constitute the world’s twelfth largest seafood company.
As none of the CFG Debtors were incorporated in the United States at the time of filing and none of them had any significant assets in the United States, jurisdiction and venue in the Bankruptcy Court was premised on the rights the CFG Debtors held in retainers on deposit with their professionals in the U.S. These retainers were funded pre-bankruptcy by Meridian Investment Group, a Ng Family entity, via their direct and indirect interests in three Peruvian operating companies – CFG Investments S.A.C., Corporacion Pesquera Inca S.A.C., and Sustainable Fishing Resources S.A.C. (collectively the “Peruvian Opcos”) – which operated the Pacific Andes Group’s anchovy fishing business and controlled a significant percentage of the anchovy fishing quotas fixed by the Peruvian government. The Peruvian Opcos were themselves subject to involuntary insolvency proceedings brought at the request of the Peruvian Opcos by three “friendly” Peruvian creditors. The Peruvian Opcos were not Chapter 11 debtors in the U.S. bankruptcy proceedings.
Prior to the Chapter 11 proceeding, two consecutive poor anchovy fishing seasons had caused the entire Pacific Andes Group to experience serious financial issues. By September of 2015, the CFG Debtors had defaulted on payments owed under the various lender facilities. In the months that followed, the CFG Debtors and their lenders made use of outside auditors, extended deadlines, and attempted to restructure the debt.
However, by November of 2015, one of the lenders filed wind-up petitions and sought the appointment of liquidations in Hong Kong and the Cayman Islands for certain of the CFG Debtors. Although petitions were granted on an interim basis, the CFG Debtors asserted that the appointment of liquidation had harmed the Peruvian Opcos’ businesses. In an effort to protect all lenders and perceive the value of the Peruvian Opcos, the lenders and the CFG Debtors entered into an understanding on December 28, 2015 that would provide the lenders with oversight and transparency as to certain non-debtor affiliates of the CFG Debtors. In exchange, the lenders agreed to support the CFG Debtors in dismissing the Hong Kong and Cayman insolvency proceedings.
When the single lender who originally filed the wind-up petitions threatened to appeal the dismissal, the CFG Debtors agreed (in another undertaking dated January 20, 2016) to make management changes, hire a CRO, and sell the Peruvian Opcos by July 15, 2016. Accordingly, the CFG Debtors engaged in a sale process and received and evaluated several bids in the beginning of June, 2016. But, ultimately, the CFG Debtors chose to file for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of New York on June 30, 2016.
The CFG Debtors’ unsecured lenders brought the subject motion to appoint a Chapter 11 Trustee asserting a number of defaults and other breaches under the following facilities: (i) a $650 million unsecured facility (of which $413 million was outstanding), dated as of March 20, 2014, which was made available to restructure the Peruvian Opcos, pay debts associated with the acquisition of the Peruvian Opcos and provide operating credit; and (ii) a $35 million facility (of which $28 million was outstanding), dated as of April 26, 2014. Certain of the CFG Debtors were also guarantors with respect to various additional facilities totaling $235 million (of which approximately $135 million was scheduled by the CFG Debtors). The lenders contended that management of the CFG Debtors misled the lenders concerning the sale process and withheld information from the board, the CROs, and the accountants, investment bankers, and financial advisors, all in violation of the letter extensions and the December, 2015 and January, 2016 undertakings.
In analyzing the motion to appoint a Chapter 11 Trustee, the Bankruptcy Court noted that Bankruptcy Code section 1104(a)(2) provides that a court “shall appoint” a chapter 11 trustee when such an appointment “is in the best interests of the creditors, any equity security holders, and other interests of the estate….” As the standard under section 1104(a)(2) is “flexible,” the Bankruptcy Court considers: (i) the debtor’s trustworthiness; (ii) the debtor’s performance (past and present) and likelihood for a successful rehabilitation or reorganization; (iii) the confidence the creditors have in the debtor and its present management; and (iv) whether the benefits of having a trustee appointed outweigh the costs associated with the appointment. These factors required factual analysis and the application of the court’s judicial discretion with respect to the relevance of those facts.
Addressing, first, the opposition filed by certain equity holders, the Bankruptcy Court determined that the equity holders were not “merely investors seeking to protect the value of their investments,” but really the managers and directors who were actually responsible for operating the CFG Debtors. Moreover, they were all members of the Ng Family and actually had no incentive to sell the Peruvian Opcos because there would be little or no return on their personal investments. Specifically, the sale of the Peruvian Opcos would likely negatively impact the Ng Family’s financial position. Therefore, the Bankruptcy Court concluded that the CFG Debtors’ management was predisposed against a sale. Since the debtor in possession owes the same fiduciary duty – including duties of care, loyalty, and impartiality – to creditors as well as the estate, a Chapter 11 Trustee might be necessary to impartially fulfill those duties and avoid a conflict of interests.
Turning to the criteria relevant to appointing a Chapter 11 trustee, the Bankruptcy Court noted that appointing a trustee is the exception and that there is a strong presumption that the debtor will remain in control of its business and affairs. Here, the Bankruptcy Court expressed significant concern over the testimony adduced at the evidentiary hearing regarding the trustworthiness of the CFG Debtors. In particular, the Bankruptcy Court learned that management had no intent to sell the Peruvian Opcos even as they signed undertakings to do so; the CFG Debtors breached the undertakings by filing the bankruptcy cases and numerous foreign insolvency proceedings; outside firms involved to provide the lenders with greater financial transparency were terminated or forced to resign; and the CFG Debtors failed to make required management and governance modifications. In addition, the Bankruptcy Court expressed concern regarding the Debtors false representations relating to the receipt of the long-term contract refunds and the CFG Debtors willingness to use those refunds in a manner inconsistent with the written loan facility documents. Despite all of these issues, the Bankruptcy Court still found the existing managers of the CFG Debtors willing and able to understand proceedings and abide by court orders, even if disagreeable. Thus, the Bankruptcy Court held that the Debtors could still meet the trustworthiness criteria.
Regarding the lenders lack of confidence in the CFG Debtors management, the Bankruptcy Court agreed that it was both justified and understandable. In arriving at this conclusion, the Bankruptcy Court focused on “management’s deliberate and pre-meditated breach” of the undertakings and “surreptitious planning of global bankruptcy and insolvency filings;” misrepresentations related to the receipt and use of the long-term contract refunds; billions of dollars in unexplained intercompany transactions; management’s removal of the oversight provided by independent third parties; management’s conflicts of interest and “hundreds of millions of unexplained purported pre-payments to Russian entities;” and conflicted advisors to the committee charged with investigating the pre-payments. As such, this factor weighed in favor of appointing a Chapter 11 Trustee.
The Bankruptcy Court also determined that the CFG Debtors’ responses failed to articulate any viable reorganization strategy. Although the CFG Debtors argued that the Bankruptcy Court should “wait and see” what happened with the Peruvian Opcos’ businesses, they did not offer a course of action, commit to any time limit on the “wait and see,” or development of a backup plan if the anchovy harvest failed to turn around the Peruvian Opcos’ fishing fortunes. Coupled with CFG Debtors’ lack of assets and operations, and any funding to acquire or initiate assets or operations, the Bankruptcy Court found this factor also weighed in favor of appointing a Chapter 11 Trustee.
Finally, the Bankruptcy Court concluded that the benefits to appointing a Chapter 11 Trustee outweighed any costs incurred by the Chapter 11 Trustee to evaluate the intercompany claims, pre-petition payments, and other potential avenues of recovery. The Bankruptcy Court noted that where the CFG Debtors had “purposefully availed themselves of the benefits afforded under the Bankruptcy Code, “they could not now complain about the costs associated with that election.”
In conclusion, the Bankruptcy Court held that the appointment of a Chapter 11 Trustee would ultimately maximize the estates’ value for the benefit of all of the CFG Debtors’ stakeholders. Interestingly, for efficiency reasons, the Bankruptcy Court only appointed a Chapter 11 Trustee for Debtor CFG Peru Singapore, which was the 100% direct and indirect owner of the Peruvian Opcos, and not for the other CFG Debtor entities.