In a recent decision, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) granted protection over the U.S. assets of a Cayman Islands exempted company in liquidation. See Revised Order Recognizing Foreign Proceeding (the “Order”), In re Saad Investments Finance Company (No.5) Limited (“SIFCO5”), Case No. 09-13985 (KG) (Bankr. D. Del. Dec. 17, 2009) (Docket No. 47). The company, SIFCO5, is subject to official liquidation proceedings in the Cayman Islands, which the Bankruptcy Court found was eligible for relief under chapter 15 of the U.S. Bankruptcy Code (the “Code”).

This decision of the Bankruptcy Court is significant given earlier decisions of other bankruptcy courts to deny or limit the availability of similar protection to other Cayman exempted companies in liquidation. See In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 132 (Bankr. S.D.N.Y. 2007) (holding that the liquidation of two Cayman Islands hedge funds was not eligible for relief under chapter 15), aff’d 389 B.R. 325 (S.D.N.Y. 2008) (previously reported in SRZ Alerts, “District Court Affirms Decision to Deny Cayman Islands Hedge Funds Access to U.S. Bankruptcy Court Under Chapter 15”, dated June 5, 2008, and “Cayman Hedge Funds Liquidators’ Request for Chapter 15 Protection Denied by Bankruptcy Court”, dated Sept. 19, 2007). See also In re Basis Yield Alpha Fund (Master), 381 B.R. 37, 55 (Bankr. S.D.N.Y. 2008) (denying Cayman fund liquidators’ motion for summary judgment seeking recognition).

Although each case is decided upon its own merits and facts, the result in SIFCO5 should be welcome news to investors, managers, administrators, liquidators and receivers of these types of entities in foreign insolvency proceedings who may have seen the earlier decisions as closing the door to obtaining the assistance of U.S. courts in connection with the liquidation of offshore entities.

Chapter 15: Protection of Foreign Debtor’s Assets in the U.S.

Chapter 15 was enacted in 2005 by Congress to “provide effective mechanisms for dealing with cases of cross-border insolvency.” See 11 U.S.C. § 1501(a). Its stated objectives include the “fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and all interested entities, including the debtor” and “protection and maximization of the value of the debtor’s assets.” See 11 U.S.C. § 1501(a)(3) and (4).

Where a debtor is in a foreign insolvency proceeding, a U.S. bankruptcy court may, on the petition of the debtor’s foreign representative, grant recognition of that foreign proceeding. If the foreign proceeding is classified by the court as a “main” proceeding, then certain protections (e.g., an automatic stay of proceedings) are automatically granted over the debtor and its U.S. assets. See 11 U.S.C. §§1517(a)(1), 1520(a)(1). A foreign “main” proceeding is a foreign proceeding that is pending in the country where the debtor has the center of its main interests or “COMI.” See 11 U.S.C. § 1502(4). In the absence of evidence to the contrary, the debtor’s registered office is presumed to be the debtor’s COMI. See 11 U.S.C. § 1516(c).1  

Facts

The debtor, SIFCO5, is a privately owned investment company organized as an exempted company under the laws of the Cayman Islands. SIFCO5 is essentially a “fund of funds,” in that its primary assets consist of limited partnership interests in a number of private equity vehicles and a hedge fund (collectively, the “Funds”). The Funds are located in different countries around the world, with the largest concentration being in the Cayman Islands and the U.S.  

SIFCO5 has two classes of equity, one held by Saad Investments Company Limited (“SICL”), a Cayman Islands exempted company, and the other by Barclays Bank PLC.

On Aug. 19, 2009, Barclays petitioned the Grand Court of the Cayman Islands (the “Cayman Court”) for a winding up order over SIFCO5. The Cayman Court granted Barclays’ petition on Sept. 18, 2009, and ordered the appointment of Geoffrey Varga and Nicolas Matthews of Kinetic Partners as the joint official liquidators (the “JOLs”) 2 over SIFCO5. As a matter of Cayman Islands law, upon their appointment, the JOLs became responsible for all aspects of SIFCO5’s business and assets.

On Nov. 11, 2009, the JOLs, as the debtor’s foreign representatives, filed a petition with the Bankruptcy Court under chapter 15 of the Code seeking recognition of SIFCO5’s Cayman liquidation and winding up proceeding (the “Cayman Liquidation”). In their pleadings, the JOLs asserted that recognition of the Cayman Liquidation under chapter 15, and the resulting application of the automatic stay, would afford them the breathing space needed to evaluate, liquidate, and maximize the value of, all of the debtor’s U.S. assets.

In support of their petition, the JOLs raised a number of factors to support a finding that SIFCO5’s COMI was in the Cayman Islands, including the following:

  • SIFCO5’s registered office was, and had always been, in the Cayman Islands;
  • SIFCO5’s management and administration was now being conducted by the JOLs from the Cayman Islands pursuant to the powers vested in them by the Cayman Court;
  • Other than tasks being performed on the JOLs’ instruction and under their direction in other jurisdictions, there was no activity being conducted in respect of SIFCO5’s management, administration or operations anywhere apart from the JOLs’ activities in the Cayman Islands;
  • SIFCO5’s statutory books and records were, and had always been, located in the Cayman Islands;
  • The estimated value of SIFCO5’s investments in Cayman Islands Funds was significantly greater than the estimated value of its assets in any other country;
  • SICL, one of SIFCO5’s two equity holders, was itself subject to liquidation and other proceedings in the Cayman Islands; and
  • Barclays, the other equity holder of the debtor, had commenced the Cayman Proceeding in the Cayman Islands.

On Dec, 4, 2009, the Bankruptcy Court granted the JOLs’ petition, finding that the record had established that SIFCO5’s COMI was in the Cayman Islands and that therefore the Cayman Liquidation would be recognized as a foreign main proceeding. See Order, ¶ 2; see also Transcript of Proceedings Before the Honorable Kevin Gross United States Bankruptcy Court Judge at 19, SIFCO5 (Dec. 4, 2009) (Docket No. 43). In addition, the Order specifically enjoined (i) litigation parties from commencing any actions or proceedings in the U.S. against the JOLs, SIFCO5 or its assets situated in the U.S. and (ii) general partners from, among other things, taking any actions relating to capital calls in respect of the U.S. Funds. See Order, ¶ 3(a) and (c).

Conclusion

In SIFCO5, the Bankruptcy Court held that the facts of the case required a finding that the COMI of the debtor was in the Cayman Islands, entitling the JOLs to the chapter 15 relief they were seeking. As noted above, while the court’s decision was based on the facts and circumstances of the case (which included a consideration of the debtor’s COMI as of the filing of the petition), it suggests that chapter 15 of the Code may be an accessible mechanism for foreign funds in cross-border insolvency proceedings to protect and maximize their U.S. assets, notwithstanding some earlier cases to the contrary.