Alert
Alert
12.14.22
In In re Global Cord Blood Corporation, No. 22-11347 (DSJ) (Bankr. S.D.N.Y.), the U.S. Bankruptcy Court for the Southern District of New York denied a petition for chapter 15 recognition of a Cayman Islands proceeding on the basis that it did not satisfy the statutory definition of a “foreign proceeding.” In reaching that conclusion, the Bankruptcy Court found that the joint provisional liquidators appointed in the Cayman Islands to oversee the proceeding had limited authority to investigate alleged corporate wrongdoing and recover assets, and were not authorized to pursue a reorganization. Further, although the joint provisional liquidators were authorized to liquidate the company, they had not, and hoped to never have to, initiate a liquidation because they believed that the company was solvent. The court thus found that the Cayman proceeding was “not a collective proceeding for the purpose of dealing with insolvency, reorganization, or liquidation,” and was instead “akin to a corporate governance and fraud remediation effort.”
Background
Global Cord was an exempted company registered in the Cayman Islands. It operated primarily in China and was headquartered in Hong Kong. Shares were traded on the New York Stock Exchange.
A significant shareholder filed a “Winding-Up Petition” in the Grand Court of the Cayman Islands (Grand Court) to challenge a transaction that allegedly diluted the company’s stock and transferred $600 million out of the company. The petition sought an order barring the company from proceeding with the transaction and providing that the company be “wound up pursuant to section 92(e) of the [Cayman Islands] Companies Act.” Section 92(e) of the Cayman Island Companies Act (Companies Act) does not reference or require insolvency and does not contemplate the classification, adjustment or resolution of specific debts. Instead, it allows the Grand Court to wind up a company if it “is of the opinion that it is just and equitable that the company should be wound up.” By contrast, section 92(d) of the Companies Act permits the Grand Court to wind up a company if “the company is unable to pay its debts.”
The shareholder also sought appointment of joint provisional liquidators pursuant to section 104(2) of the Companies Act. That provision authorizes applications for appointment of provisional liquidators where there is a prima facie case for making a winding-up order and appointment of provisional liquidators is found to be necessary to prevent dissipation or misuse of corporate assets, to prevent oppression of minority shareholders, or to prevent mismanagement on the part of the company’s directors. Section 104(2) of the Companies Act, which does not mention or require any showing of insolvency, stands in contrast to section 104(3), which authorizes the appointment of a provisional liquidator “on the grounds that—(a) the company is or is likely to become unable to pay its debts … and (b) the company intends to present a compromise or arrangement to its creditors.”
On September 22, 2022, the Grand Court entered an order granting the requested relief and appointing three individuals as joint provisional liquidators (JPLs). Under Cayman Law, the JPLs’ powers are limited by the order appointing them. The Grand Court’s appointment order directed the JPLs to take such steps as they conclude in their discretion may be necessary or expedient to “protect and preserv[e] the value of the Company’s assets, rights and/or property,” and to “prevent[ ] the dissipation or misuse of the Company’s assets.” The order also authorized the JPLs to investigate and report on the affairs of Global Cord within and without the Cayman Islands. Finally, the Grand Court’s order authorized the JPLs to “commence winding up proceedings and/or any insolvency process in the Cayman Islands or any other country.” However, evidence presented to the Bankruptcy Court established that no such winding-up proceeding had been commenced, and the JPLs conceded in a submission to the Bankruptcy Court that they believed Global Cord was solvent.
Following entry of the Grand Court’s appointment order, the JPLs filed a Chapter 15 Petition for Recognition of a Foreign Proceeding in the Bankruptcy Court seeking (a) recognition of the Cayman proceeding as a foreign main proceeding pursuant to section 1517 of the Bankruptcy Code and (b) authority to seek discovery and examine witnesses pursuant to sections 1520(a) and 1520(b) of the Bankruptcy Code.
The petition was opposed by a shareholder and certain of Global Cord’s independent directors. They asserted that the Cayman proceeding was commenced under the Companies Act’s “just and equitable” provisions rather than its provisions relating to the adjustment of debts or the liquidation or “winding up” of companies. They argued that, therefore, the Cayman proceeding did not satisfy the Bankruptcy Code’s definition of “foreign proceeding” and thus did not qualify for recognition.
The Bankruptcy Court’s Decision
In a 30-page opinion, the Bankruptcy Court sided with the objectors and denied the JPLs’ petition without prejudice. The Bankruptcy Court’s decision started from the proposition that chapter 15 of the Bankruptcy Code only provides for recognition of a “foreign proceeding,” which is defined 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.
11 U.S.C. § 101(23). The Bankruptcy Court concluded that Global Cord’s Cayman proceeding did not satisfy that definition for two reasons: it was not a “collective proceeding,” and it was not initiated “for the purpose of reorganization or liquidation.”
In concluding that the Cayman proceeding was not a “collective proceeding,” the Bankruptcy Court relied on precedent holding that a “collective proceeding is one that considers the rights and objectives of all creditors,” and “contemplates both the consideration and eventual treatment of [creditor] claims.” Global Cord’s Cayman proceeding did not satisfy that standard because, as the record established, Global Cord’s creditors had not received formal notice of its commencement and did not have standing to participate in it. Also, the Cayman proceeding did not involve any effort to identify or classify creditors or determine how and whether to satisfy their claims.
The Bankruptcy Court also concluded that the Cayman proceeding was not initiated “for the purpose of reorganization or liquidation.” The Grand Court’s order appointing the JPLs gave them the primary task of preserving Global Cord’s assets and investigating and reporting on its affairs. No “winding-up” process had been commenced in the Cayman Islands, and the JPLs were not pursuing any effort to “liquidate” corporate assets or the corporation itself. In fact, the JPLs conceded that they believed the company was solvent and that they hoped to avoid having to liquidate the company.
The Bankruptcy Court found support for its conclusion not only in the plain text of the Bankruptcy Code, but also in the UNCITRAL Enactment Guide, which provides interpretive guidance on the Model Law on Cross-Border Insolvency. That guidance indicates that the Model Law on Cross-Border Insolvency does not contemplate recognition of proceedings, like Global Cord’s Cayman proceeding, which are “designed to prevent dissipation and waste rather than to liquidate or reorganization [an] insolvency estate” or are “designed to prevent detriment to investors rather than to all creditors.” The Bankruptcy Court noted that the UNCITRAL Enactment Guide is an appropriate source for construing the meaning of chapter 15’s provisions because chapter 15 was designed to implement UNCITRAL consistent with its usage internationally. See 11 U.S.C. § 1501 (“In interpreting this chapter, the court shall consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statues adopted by foreign jurisdictions.”).
Conclusion
Although U.S. bankruptcy courts often grant chapter 15 petitions filed by Cayman joint provisional liquidators, such recognition is not automatic. Instead, the joint provisional liquidators must establish that the primary purpose of the proceeding for which recognition is sought is to protect creditors through a reorganization or liquidation.
The Bankruptcy Court’s decision established that not all Cayman proceedings satisfy that standard. Instead, according to the Bankruptcy Court, Cayman proceedings that qualify for recognition under chapter 15 frequently involve one of three features: (1) the petition for recognition was filed by official liquidators after entry by the Grand Court of a final winding-up (i.e., liquidation) order, (2) the petition was filed by joint provisional liquidators that were appointed under section 104(3) of the Companies Act, which authorizes appointment of joint provisional liquidators when “the company is or is likely to become unable to pay its debts” and it “intends to present a compromise or arrangement to its creditors,” or (3) the petition was filed by joint provisional liquidators that were granted authority by the Grand Court under section 86 of the Companies to enter into a “compromise or arrangement”—i.e., a scheme of arrangement—between the company and its creditors.
The Bankruptcy Court’s list is not exhaustive and there may well be many other types of Cayman proceedings that qualify for recognition. However, the list illustrates that U.S. bankruptcy courts will closely scrutinize governing Cayman law to ascertain the true purpose of a foreign proceeding.