A Recent Experience of a Cross-Border Insolvency in the Caribbean
By Timothy Le Cornu and Margot MacInnis
Published in Global Insolvency & Restructuring Review 2011/12
Cross-border insolvency is an area of constant change. In the last few years in particular we have experienced the introduction of new or updated law, court decisions in landmark cases and creative practitioners finding new ways to deal with complex problems.All of these factors contribute to the refinement and development of insolvency practice across countries and continents.This article looks at the adoption by some countries of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross–Border Insolvency (‘the Model Law’) and how insolvency practitioners from the largest Caribbean jurisdictions of Cayman Islands, British Virgin Islands (BVI),Bermuda and Bahamas have utilised the Model Law to their advantage and how these jurisdictions have responded with similar provisions.
Cross-border insolvency law and practice have evolved dramatically in the last 20 years due to the impact of globalisation,technological advances and the resulting increase in multi-jurisdictional insolvencies.Until recent years, cross-border insolvencies had less certainty of outcome than a purely domestic procedure.Conflict of laws created disputes over jurisdiction,which were then further complicated by distance, language barriers, delay and prone to duplication of costs. For Caribbean countries, given their size and geographic location relative to other financial centres, cross-border insolvency has long been a practical necessity.
The aim of any insolvency legislation and, by extension, practice is to identify,take control of, protect and realise the assets of the debtor pending the identification and agreement of creditor claims and distribution.The Model Law has been adopted by a number of countries in recent years to more effectively deal with cases of cross-border insolvency and allow these fundamental principles to apply more consistently in such cases.Where adopted,the Model Law opens up avenues for foreign liquidators to more effectively administer an insolvent estate with assets and creditors in multiple jurisdictions.
The vast majority of insolvency appointments in the Caribbean are official or court-supervised liquidations.Unlike the US and the UK,these jurisdictions have not yet implemented a rescue regime similar to Chapter 11 or Administrations, which comprise the majority of formal insolvency procedures in those countries. Furthermore,the majority of insolvency appointments in the Caribbean stem from fraud having been committed against the debtor company,most often by management located in an onshore jurisdiction.As a result, insolvency practitioners in offshore centres have vast experience in forensic accounting, investigations and litigation, as they seek to recover losses from responsible parties in a variety of onshore jurisdictions.
Offshore jurisdictions have a relative lack of ‘brick and mortar’ engagements with the majority of cases involving investment vehicles such as hedge funds, international business companies (IBCs), captive insurance and reinsurance companies. It is rare that the operations, books and records or assets are located within the jurisdiction where the liquidator is appointed. Onshore insolvency appointments will invariably involve factories,retail outlets or the like where records,staff and the nerve centre of the company are located in one or more locations within the jurisdiction.
A typical scenario in the Caribbean involves a foreign-owned company which is incorporated in the jurisdiction but which has substantial assets (mostly securities) and business activities located elsewhere. Aside from the registered office,statutory filing and regulatory requirements,there is often little association within the jurisdiction at the time of appointment.A hedge fund’s administrator, investment advisor, brokers and other service providers are usually located in leading onshore financial centres. As a result, offshore liquidators have to immediately commit a large amount of time and resources, following their appointment,to collect the books and records of the company, identify and secure the assets as well as establish a means of correspondence with creditors.
The appointments encountered in the Caribbean generally have links to three distinct geographic regions;America, Europe and Asia. The Cayman Islands and Bermuda registered entities will often have structures with American links. For example, of the 9,000 hedge funds registered in the Cayman Islands, over 50% of the assets are being managed in the US (primarily New York). Bermuda’s insurance market has a high proportion of reinsurance companies with connections to the US. In cases with US links,the offshore liquidator runs the liquidation from the jurisdiction of appointment, utilising local staff and resources.The liquidator will seek to gain control of assets located in the US and generally physical assets such as cash and securities will be transferred to the control of the liquidator soon after his appointment. However, in cases where creditors may be taking action in the US to attach assets, or where the liquidator’s assets include potential claims against third parties,the liquidator will need to consider seeking recognition of the estate as a ‘foreign main proceeding’ and his appointment as a ‘foreign representative’ under Chapter 15 of the United States Bankruptcy Code to enable him to pursue those claims, or to seek the automatic stay of proceedings available to him to protect assets for the benefit of the creditors as a whole.
KRyS Global recently obtained recognition as a foreign main proceeding in New York in the case of the BVI liquidation of Fairfield Sentry Limited (‘Fairfield Sentry’),the largest of the Madoff feeder funds. Obtaining recognition was part of the liquidators’ strategy to realise and maximise recoveries and has allowed the liquidators to expand the scope of claims and remedies being pursued in the US while protecting the estate.The liquidators have subsequently filed a number of complaints in the US against investors that have been ‘unjustly enriched’ through redemption payments based on an inflated net asset value as a direct result of the Madoff fraud. In addition to this, it has allowed the liquidators to consider obtaining discovery orders against any US-based service providers or other third parties in helping to assess potential third party claims.
As readers would be aware, due to a number of widely reported cases, being granted recognition as a foreign main proceeding is not an automatic right and is subject to the particular facts of the case, most notably where the debtor has its centre of main interests, or COMI. The advantage of obtaining recognition in the US is that additional rights of recovery may ensue, which would otherwise be unavailable. It is therefore incumbent on the liquidator to carefully assess the requirements to maximise the chances of a successful application for recognition to the US Bankruptcy Court.
Appointments originating from Asia sometimes involve a practitioner from that jurisdiction (‘foreign appointee’) being appointed jointly with a Caribbean practitioner over an IBC which in turn has investments or subsidiaries in the People’s Republic of China (PRC).
For joint appointments of this type,the regulations in Cayman and BVI allow for a foreign practitioner to be appointed jointly with a resident qualified insolvency practitioner. In BVI the foreign practitioner also needs approval from the Financial Services Commission to accept a joint appointment.The foreign practitioner must meet the standards required for domestic insolvency practitioners and submit evidence of his qualifications and experience. In practice this can serve as a highly effective method of ensuring that a cooperative and unified approach is adopted in cross-border insolvencies of Caribbean-based companies.Conversely in Bermuda and Bahamas, a local appointee is not required and the courts will generally accede to a request for the appointment of a recognised foreign practitioner.
When joint appointments occur,the liquidation strategy and most of the ‘coal face’ work of a company with PRC investments is carried out by the foreign appointee, while the role of the local appointee is generally to assist with the statutory requirements and oversight so the liquidation is managed in line with the local court’s expectations. The PRC has not adopted the Model Law in full, although Article 5 of the Enterprise Bankruptcy Law (EBL) introduced in 2007 does provide for the recognition of a foreign proceeding in China, provided that such recognition does not violate the basic principles of PRC law nor impair the national sovereignty,security or public interests of the PRC. On closer inspection of the text of the article, it is apparent that in order for a foreign proceeding to be recognised, a country must have a treaty, specific to bankruptcy, with the PRC before being afforded recognition in the PRC.
As recognition in the PRC is therefore generally unavailable to the liquidators,they will seek control of the IBC’s PRC registered subsidiaries which often have substantial assets and operations in the PRC.This is generally achieved by changing the directors and legal representative of the PRC subsidiaries to the liquidators of the Caribbean company or their nominees. Practically, changing the legal representative is not always simple as the incumbent must agree to the change. If not, lengthy and costly court action may be required to enforce the change which may result in further dissipation of assets while the issue is decided. If the legal representative and directors can be changed,they may then apply to the PRC Court under the EBL for a reorganisation, composition or liquidation.
However, in practice there remain significant obstacles to the successful and consistent application of the EBL across the PRC. Issues identified as roadblocks to successful implementation of the EBL include a lack of trained PRC professionals to undertake the work,the absence of judicial autonomy, lack of guidance notes and procedures to assist in implementation of the EBL and local protectionism by regional government and authorities.As a result courts in different regions have interpreted the law inconsistently, or in a manner which appears contrary to the statute.These hurdles have contributed to the limited use of the EBL since its introduction.
In a recent case in which KRyS Global was involved,the PRC Court refused a reorganisation application made by the liquidators (in their capacity as directors of the PRC subsidiary) due to:(i) the legal representative objected to the liquidators’ appointment as directors (and the local authority refused to update the registers); and (ii) the Court required details of the identity of a potential new investor,(including the amount to be invested) to be provided prior to making an order that the company be reorganised.This was despite the primary requirement of the EBL for an application for reorganisation (i.e., demonstrating insolvency) having been established.Many observers note that the success of the EBL in the future will depend on the de-politicisation of the process and the ability of the Courts to act independently. Despite these difficulties, it has been possible for foreign liquidators to gain control over PRC subsidiaries to facilitate a reorganisation of the debtor by introduction of a ‘white knight’ investor.
In liquidations involving European elements,the approach adopted by an offshore liquidator will depend on the country involved.The EU introduced the EC Insolvency Regulations in 2004, which determine the proceedings of insolvency matters involving more than one member of the Union.The regulations do not apply to non-EU member countries,meaning that the benefits of automatic recognition afforded to all EU member countries are not available to an offshore liquidator and the options therefore require careful scrutiny.
In the UK, a version of the Model Law was adopted by enactment of the Cross-Border Insolvency Regulations 2006 (the UK Regulations).The UK Regulations allows a foreign insolvency practitioner to apply directly to a British court for recognition, provided certain criteria are met (including the question of COMI) in which case the British court is required to recognise the foreign proceeding. Other countries in Europe to adopt the Model Law include Germany, Romania and Greece.
In the Caribbean, only BVI has adopted the Model Law in its entirety as Part XVIII of its Insolvency Act of 2003 (which also introduces Administrations) but this law has yet to be enacted and remains unused. Despite this,the BVI Court has granted foreign practitioners orders in aid without conferring status as a foreign representative under Part XIX of theAct. Most notably, Irving Picard,the US trustee of Bernard L.Madoff Investment Securities LLC (BLMIS) was successful in such an application in 2010.
Elsewhere,the Grand Court of the Cayman Islands has historically seen a large volume of cross-border insolvency cases, and the introduction of revisions to the Companies Law,which became effective in 2009, codifies previous Court practice to allow foreign liquidators recognition of a foreign proceeding and for the granting of declaratory and ancillary orders,such as enforcement of judgements and the staying of proceedings. Picard was successful in gaining recognition in the Cayman Islands under the new provisions (specifically Section 241(1)(a) of the Companies Law (2010 Revision)) enabling him to commence proceedings in the Cayman Islands or to seek ancillary orders,such as staying of proceedings or orders for the handing over of BLMIS property within the Islands.
The Court in Bermuda has also adopted a flexible and cooperative approach in cross-border insolvency matters over a long period. In two recent judgements, involving Saad Investments and Kingate Global,the Supreme Court of Bermuda continues to demonstrate its willingness to provide recognition and assistance to foreign courts and liquidators in the resolution of cross-border insolvency issues relating to Bermuda as a matter of common law.
In Saad Investments,Mr. Justice Kawaley recognised the appointment of liquidators made by an order of the Grand Court of the Cayman Islands, granting them the ability to conduct aspects of the liquidation in Bermuda. In the Kingate matter,Mr. Justice Kawaley ordered two BVI companies (already in compulsory liquidation in the BVI) to be wound up in an ancillary compulsory liquidation under the supervision of the Supreme Court of Bermuda. Further orders were granted which provided the liquidators with the power to obtain documents from the auditors of the companies to continue their investigations.
International protocol agreements (defined as an agreement between a liquidator and a foreign counterpart when they are both appointed over the same company under dual insolvency proceedings) have been used in practice in the Cayman Islands for a number of years.The law now imposes a duty on official liquidators to consider whether it is appropriate to enter into one. In making that assessment, an official liquidator will likely consider the purpose of an international protocol which, by definition, is designed “to promote the orderly administration of the estate of a company in liquidation and avoid duplication of work and conflict between an official liquidator and the foreign officeholder.”
Caribbean jurisdictions each have their own unique market as noted in the primary industries of each jurisdiction in Figure 1.While much of the insolvency law is based on the Insolvency Act 1986,these jurisdictions have matured to reflect the types of appointment and local conditions of the jurisdiction.
The Model Law, where enacted, and where recognition as a foreign main proceeding can be obtained, provides Caribbean liquidators with greater certainty in being able to secure assets, initiate litigation and defend claims, ultimately leading to an enhanced prospect of success in realising assets for the creditors as a whole.With many jurisdictions yet to enact the Model Law, liquidators often need to be creative in devising strategies that suit the jurisdiction in which they require assistance.The key to the success for Caribbean practitioners involves strong relationships with insolvency practitioners and attorneys that can provide the required expertise and advice in other jurisdictions where necessary.
While the Model Law has not been formally adopted in the Caribbean to date, a combination of revisions to local insolvency law, common law and court decisions have combined to provide outcomes consistent with Model Law objectives in most cases. Onshore practitioners should feel confident that assistance will be available where needed in these Caribbean jurisdictions,seeking local expert advice as required