When is a Cayman Islands liquidation not a foreign proceeding?
By Francisco Vazquez and Michael Berthiaume (Norton Rose Fulbright US LLP)
United States courts have typically concluded that offshore liquidations are “foreign proceedings” eligible for recognition under Chapter 15 of the United States Bankruptcy Code. See, for example, the 2017 decision by the US Bankruptcy for the Court Southern District of New York in In re Ocean Rig UDW granting recognition to a Cayman Islands provisional liquidation; the 2020 decision of the same court in In re Olinda Star granting recognition to a British Virgin Islands provisional liquidation; and the New York court’s 2021 decision in In re Culligan granting recognition to a Bermuda liquidation.
However, according to the Southern District of New York Bankruptcy Court, not all offshore liquidations are foreign proceedings. In December, in In re Global Cord Blood Corp, the Bankruptcy Court found that a Cayman Islands liquidation brought to investigate alleged misconduct was not a foreign proceeding because it was not a “collective proceeding brought for the purpose of reorganization or liquidation.” Accordingly, the Bankruptcy Court denied the liquidators’ petition for recognition of the Cayman Islands proceeding under Chapter 15.
Background
Global Cord Blood Corporation is a Cayman Islands exempted company that operated in the People’s Republic of China. Pursuant to a series of transactions, Global Cord was to acquire the shares of Cellenkos, Inc, which among other things, would have resulted in the issuance of new shares of stock in Global Cord. The Cellenkos transaction and the ownership of the shares in Global Cord was the subject of significant litigation outside the US.
In particular, a boutique investment management firm, Blue Ocean Structure Investment Company, and Hong Kong-headquartered Golden Meditech Stem Cells (BVI) Company asserted conflicting ownership interests in Global Cord. According to Golden Med, Blue Ocean had previously assigned its interest in Global Cord to it, and so Golden Med – not Blue Ocean – controlled Global Cord. This ownership dispute was (and remains) the subject of litigation in the British Virgin Islands.
In parallel, Blue Ocean challenged the Cellenkos transaction in the Cayman Islands by filing a winding-up petition under Section 92(e) of the Cayman Islands Companies Act with the Grand Court of the Cayman Islands. According to Blue Ocean, the Cellenkos transaction would have significantly diluted the value of its shares in Global Cord. Blue Ocean also alleged that the Cellenkos transaction was “in furtherance of improper and self-serving transactions that violated the fiduciary duties of board members and/or officers.” The boutique investment management firm advanced its challenge under Section 92(e) of the Cayman Islands Company Act, pursuant to which a court may wind-up a company if it is “just and equitable” to do so under the circumstances. In the winding-up petition, Blue Ocean requested the Grand Court enter an order (1) compelling Global Cord not to proceed with the transaction, (2) limiting Global Cord’s ability to create new shares, and (3) replacing Global Cord’s board of directors. In addition, Blue Ocean asked the Grand Court to appoint official liquidators to administer Global Cord’s winding up.
On 22 September, the Grand Court issued an order directing the appointment of joint provisional liquidators (JPLs) and entrusting them with the responsibility to preserve the value and prevent dissipation of Global Cord’s assets and investigate and report on its affairs. More specifically, the order suspended the powers of Global Cord’s board, and authorised the JPLs to take possession of Global Cord property, act on behalf of the company, to discharge debts, and take a variety of actions in furtherance of these responsibilities.
The Grand Court further authorised the JPLs to commence winding up proceedings and/or an insolvency process in the Cayman Islands or elsewhere. The JPLs, however, concluded that Global Cord was solvent and, therefore, did not commence such a proceeding. Instead, they filed a petition under Chapter 15 for recognition of the Cayman proceeding as a foreign proceeding.
Golden Med opposed recognition arguing, among other things, that the Cayman proceeding does not involve insolvency and does not address Global Cord’s debts. According to Golden Med, the Cayman proceeding was commenced to facilitate an investigation and the recovery of allegedly misappropriated funds, and not to address Global Cord’s financial issues.
Analysis
Chapter 15 of the Bankruptcy Code was enacted to, among other things, foster cooperation between courts of the United States and courts of foreign countries “involved in cross-border insolvency cases” as stated in Title 11, Section 1501(a) of the United States Code. By its terms, Chapter 15 applies where “assistance is sought in the United States by a foreign court or a foreign representative in connection with a foreign proceeding.” (Title 11, Section 1501(b)). Absent a foreign proceeding, a Chapter 15 petition for recognition should be denied.
The Bankruptcy Code defines a foreign proceeding as “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” (Title 11, Section 101(23)).
In Global Cord, the Bankruptcy Court, as have others, broke the definition into the following seven elements: (1) the existence of a proceeding; (2) that is either judicial or administrative; (3) that is collective in nature; (4) that is in a foreign country; (5) that is authorised or conducted under a law related to insolvency or the adjustment of debts; (6) in which the debtor’s assets and affairs are subject to the control or supervision of a foreign court; and (7) which proceeding is for the purpose of reorganisation or liquidation.
The parties agreed that the Cayman proceeding satisfied four of the seven elements, namely (i) the existence of a proceeding; (ii) that is either judicial or administrative; (iii) that is in a foreign country; and (iv) in which the debtor’s assets and affairs are subject to the control or supervision of a foreign court. However, the parties did not agree that (a) the Cayman proceeding was a “collective” proceeding; (b) the Cayman proceeding arose “under a law relating to insolvency or adjustment of debt;” or (c) it was “for the purpose of reorganization or liquidation”.
Before turning to the Bankruptcy Court’s analysis of the three disputed elements, it is critical to note that the winding up petition commencing the Cayman proceeding was filed under Section 92(e) of the Companies Act, which, as noted above, permits a court to order the winding up of a company when it would be “just and equitable” regardless of the financial condition of the debtor. In contrast, Section 92(d) of the Companies Act permits a court to order the winding up of a company if the company is unable to pay its debts.
The Cayman proceeding was not a “collective proceeding”
According to the Bankruptcy Court, the Cayman proceeding was not a collective proceeding. In general, a proceeding is collective if it inures to the benefit of all creditors and concerns all interests of the creditor body as a whole. Accordingly, US courts have generally been reluctant to recognise receiverships, because they are not collective proceedings in that they typically benefit only one creditor or one class of creditors. Regardless of the level of participation of creditors in the foreign proceeding, the judge in Global Cord said all creditors “must receive notice and be able to protect their rights” for a proceeding to be collective, quoting a 2021 decision in In re PT Bakrie Telecom.
The JPLs acknowledged that the Cayman proceeding did not embody the “hallmarks of a collective proceeding,” seeking to identify creditors, quantifying and classifying debts, or determining a scheme of distribution. Nevertheless, the JPLs argued that the Cayman proceeding was collective because it benefited the corporation as a whole and, unlike receiverships, did not benefit a discrete subset of claimants. Merely because the Cayman proceeding had no claims reconciliation process, was of no consequence because the JPLs were hopeful Global Cord would remain solvent and pay its creditors without the assistance of insolvency proceedings.
The court declined to adopt the JPLs’ broad interpretation of “collective” and found that the focus should properly be on the involvement of creditors in the Cayman proceeding. This focus, the court explained, avoids expanding Chapter 15 beyond foreign insolvency proceedings, which would improperly afford bankruptcy court assistance to proceedings aimed at counteracting corporate fraud. Considering the limited creditor participation in the Cayman proceeding, the Bankruptcy Court found that it was not collective. In particular, the Bankruptcy Court highlighted that the Cayman proceeding was not a forum for the JPLs to identify creditors, to quantify and classify Global Cord’s debts, or to propose a scheme to make distributions to creditors. Tellingly, no creditors had even received notice of the winding up petition, no claim submission process was in place, and no “winding up” process had been initiated.
The Cayman proceeding was “under a law relating to insolvency or adjustment of debt”
Golden Med argued the Cayman proceeding did not arise “under a law relating to insolvency or adjustment of debt.” Specifically, Golden Med highlighted that the Cayman proceeding was commenced under Section 92(e) of the Cayman Companies Act, which authorises a winding up when it would be “just and equitable”. Moreover, the JPLs were appointed under Section 104(2) of the Cayman Companies Act, which authorises the appointment of liquidators where it is necessary to (i) prevent the dissipation or misuse of a company’s assets, (ii) prevent the oppression of minority shareholders, or (iii) prevent mismanagement or misconduct by a company’s directors. According to Golden Med, because these provisions do not address insolvency or winding up, but rather provide internal remedies such as the replacement of management, the Cayman proceeding cannot be said to have arisen under a law relating to insolvency. These sections, Golden Med argued, are in contrast to other provisions of the Cayman Companies Act that do relate to insolvency and adjustment of debt, such as Section 92(d), which permits the winding up of a company “unable to pay its debts,” and Section 104(3), which authorises the appointment of JPLs on the grounds a company is unable to pay its debts.
The Bankruptcy Court disagreed with the narrow reading proposed by Golden Med. Instead, the Bankruptcy Court concluded the relevant test is not whether the current proceeding concerns insolvency, but whether the current proceeding was brought under a law that (as a whole) relates to insolvency. According to the Bankruptcy Court, the Cayman Companies Act, like other offshore companies acts, is a comprehensive statute that addresses “multiple questions relating to corporations,” including a company’s insolvency and winding-up. Finding that the Cayman Companies Act includes provisions that relate to insolvency, the court concluded that the Cayman Companies Act is a law relating to insolvency or the adjustment of debt. As a result, the Cayman proceeding satisfied this element of a foreign proceeding.
The Cayman proceeding was not “for the purpose of reorganisation or liquidation”
Finally, Golden Med argued the Cayman proceeding was not advanced for the purpose of reorganisation or liquidation. According to Golden Med, the Cayman proceeding did not concern creditor issues, Global Cord’s debts, or Global Cord’s winding up or liquidation. The Bankruptcy Court agreed and held that the Cayman proceeding had been commenced, and the JPLs had been appointed, to preserve Global Cord’s assets and to investigate internal affairs, including the decision to implement the Cellenkos transaction. It was not brought to reorganise or liquidate Global Cord. Specifically, the bankruptcy court noted that the Cayman proceeding was commenced and the JPLs were appointed under Sections 92(e) and 104(2) of the Companies Act, respectively, to prevent (i) misuse of assets, (ii) oppression of shareholders, and (iii) mismanagement. Moreover, while the order appointing the JPLs contemplated a future winding up process, no winding up process had been commenced nor was any liquidation being pursued. According to the court, the mere possibility that a liquidation could occur in the future was not sufficient.
Chapter 15 incorporates the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross Border Insolvency into US law. Given the international origin of Chapter 15, a US court may consult the Guide to Enactment that accompanies the Model Law when addressing issues raised in the context of a Chapter 15 case. Here, the Bankruptcy Court noted that the Guide to Enactment highlights the possibility that a proceeding may satisfy certain elements of a foreign proceeding, but “nevertheless be ineligible for recognition because they are not for the stated purpose of reorganization or liquidation.” Indeed, the Guide to Enactment contemplated that proceedings brought to prevent dissipation, waste, or detriment to investors, but not liquidation, reorganisation, or to protect creditors’ rights would not be eligible to recognition. As a result, the Bankruptcy Court’s conclusion was consistent with the aim of the Model Law, which is the basis of Chapter 15.
Conclusion
A United States court can recognise a foreign proceeding under Chapter 15 and courts have concluded that the definition of a foreign proceeding is broad. However, the defined term “foreign proceeding” does not encompass every proceeding pending outside the US. A court must be satisfied that all of the elements of a foreign proceeding are satisfied before considering the other requirements for recognition, including a determination of a debtor’s centre of main interest or the location of a debtor’s establishment. Here, the court concluded that the Cayman proceeding was not a foreign proceeding at this time.
The Cayman proceeding was generally referred to as a winding up and liquidators were appointed, so at first glance, it bore several of the characteristics of a traditional foreign proceeding. However, the Cayman proceeding was commenced and the liquidators were appointed to investigate alleged misconduct and to recover corporate assets. As such, it was not for the purpose of reorganisation or liquidation and could not be recognised under Chapter 15. The Bankruptcy Court noted this purpose may change and left open the possibility of recognising the Cayman Proceeding at a later date should the liquidators undertake a liquidation of Global Cord’s assets or the adjustment of Global Cord’s debts.
The Bankruptcy Court’s decision highlights the potential impediments to recognition of a liquidation brought under Section 92(e) of the Cayman Companies Act.
However, the Global Cord decision should not cast doubt upon the recognition of liquidations brought under Section 92(d) of the Cayman Companies Act, which permits the winding up of a company “unable to pay its debts”, and are commonly recognised as foreign proceedings under Chapter 15.
* This article was first published in the Global Restructuring Review, and was subsequently republished by INSOL International