At times, United States courts have been reluctant to grant recognition to foreign proceedings involving offshore “exempted” companies under Chapter 15 of the Bankruptcy Code. For example, the United States Bankruptcy Court for the Southern District of New York denied a request for recognition of the Cayman Islands liquidation of certain Bear Stearns funds. Following the Second Circuit’s decision in In re Fairfield Sentry Ltd., 714 F.3d 127 (2d Cir. 2013), the New York bankruptcy court has granted recognition to foreign proceedings involving offshore exempted companies. Most recently, the United States Bankruptcy Court for the Southern District of New York granted recognition to the Cayman Islands provisional liquidation of Suntech Power Holdings Co. Ltd., an exempted company, under Chapter 15 of the Bankruptcy Code after concluding that (1) Suntech Holdings was eligible to be a debtor under the Bankruptcy Code, (2) venue was proper in the Southern District of New York, and (3) Suntech Holdings’s center of main interest was the Cayman Islands. See In re Suntech Power Holdings Co., Ltd., No. 10383 (SMB) (Bankr. S.D.N.Y. November 17, 2014).
Overview of Chapter 15’s Requirements
Chapter 15 of the Bankruptcy Code provides a relatively straightforward procedure to obtain recognition of a foreign bankruptcy, insolvency, liquidation or debt restructuring (i.e., a “foreign proceeding”) in the United States. In general, a foreign proceeding shall be recognized if (1) the foreign proceeding is a foreign main or foreign nonmain proceeding, (2) the petition for recognition was filed by a foreign representative and (3) the petition satisfies certain procedural requirements. A foreign main proceeding is one pending where the debtor has the center of its main interests. A foreign nonmain proceeding is one pending where the debtor carries out nontransitory economic activity. Additionally, in the Second Circuit, which includes New York, a foreign proceeding will only be recognized if the foreign debtor resides or has a domicile, a place of business, or property in the United States.
Suntech Holdings was Eligible to be a Debtor
On January 27, 2014, the joint provisional liquidators, Suntech Holdings (the debtor) and certain holders of notes issued by the debtor entered into a restructuring support agreement, pursuant to which the provisional liquidators were required to commence a Chapter 15 case on or before February 21, 2014. Prior to entry into the restructuring agreement, the debtor did not have any property or conduct business in the United States. Despite their efforts, the provisional liquidators were unable to open a bank account in the debtor’s name. Apparently, there was not sufficient time for a traditional bank to conduct the necessary due diligence. Instead, the provisional liquidators transferred $500,000 from the debtor’s Cayman Islands account to a bank account in the name of the debtor’s agent. Disbursement from that account were to be governed by a “disbursement letter” that was signed by the provisional liquidators, but not by the agent.
Because the agent’s bank account was located in New York, the court noted that New York law governs ownership. Under New York law, the holder of funds in a bank account is presumed to be an owner. The presumption, however, may be rebutted by demonstrating that the purported owner holds the funds for the benefit of another person or another person effectively exercises control over the funds. Here, the debtor’s agent was presumed to be the owner. Notwithstanding the presumption or the lack of execution of the disbursement letter by the agent, the court concluded that the funds in the agent’s account belonged to the debtor. Indeed, the parties understood and, at all relevant time, acted as if the agent had no interest in the funds and that the agent held them for the benefit of the debtor. Thus, Suntech Holdings had funds in the United States and was therefore eligible to be a debtor in the United States.
In objecting to recognition, Solyndra Residual Trust did not contest Suntech Holdings’s eligibility to be a debtor. Indeed, it argued that Suntech Holdings was eligible to be a debtor, because it had a principal place of business in California. According to Solyndra, however, the court should disregard the funds in analyzing the eligibility requirements, because the transfer of funds to the United States on the eve of the Chapter 15 filing was improper. The court disagreed with Solyndra and found that the debtor did not conduct any business in the United States. Moreover, the court was not troubled by the transfer of funds to the United States to satisfy the debtor eligibility requirements. “Interpreting the Bankruptcy Code to prevent an ineligible foreign debtor from establishing eligibility to support needed chapter 15 relief will contravene the purpose of the statute.” In particular, it would “hinder the restructuring of this multi-national business as contemplated by chapter 15.”
Venue of Suntech Holdings’ Chapter 15 Case was Proper in New York
Venue of a Chapter 15 case is proper where the debtor has its principal place of business or principal asset in the United States. If the debtor does not have a place of business or assets in the United States, then venue is proper where there is litigation pending against the debtor. If there is no litigation pending against the debtor in the United States, a Chapter 15 case may be filed in the district “in which venue will consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative.”
Here, the debtor’s funds in New York was its principal assets in the United States and therefore venue of the Chapter 15 case was proper in New York. Nevertheless, Solyndra argued that venue of the Chapter 15 case should be the Northern District of California, because the debtor’s principal place of business in the United States was San Francisco. The court, however, concluded that the debtor, a holding company for a group of subsidiaries that operated worldwide, did not conduct any business in California. Indeed, the debtor could not conduct business in California, because it did not have a certificate of qualification, as required by California law. Moreover, the fact that the debtor’s secretary and general counsel (one individual) resided in California did not support Solyndra’ s assertion that the debtor conducted business there. Under the corporate governance, neither the secretary nor general counsel had any authority to conduct the debtor’s business. Further, once the provisional liquidators were appointed, the secretary and general counsel had no authority to act on behalf of the debtor without Suntech Holding. Thus, the court was not convinced that the provisional liquidators improperly manipulated venue by transferring funds to New York.
The Provisional Liquidation was a Foreign Main Proceeding
Under the Bankruptcy Code, a corporate debtor’s registered office is presumed to be its center of main interest. That presumption may be rebutted. According to Solyndra, the debtor’s center of main interest was not in the Cayman Islands, because Suntech Holdings “represented to the world that it was headquartered in Wuxi China” and all of the debtor’s “directors, decision makers and employees” were outside of the Cayman Islands.
In this instance, the court noted that the debtor’s center of main interest was not the Cayman Islands as of the date of the commencement of the provisional liquidation. Indeed, the debtor was an “exempted company” and under Cayman Islands law could “not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside of the Cayman Islands.” The court noted, however, that the operative date is the date of the Chapter 15 filing and not the date of the commencement of the foreign proceeding. Upon their appointment, the provisional liquidators, who had assumed control of the debtor’s affairs, took steps to centralize the administration of the provisional liquidation in the Cayman Islands. They, among other things, updated the debtor’s address in SEC filings, informed the debtor’s lenders to send notices to them in the Cayman Islands, published notices directing creditors and other interested parties to them, appointed a Cayman Islands director, and conducted board meetings from the Cayman Islands. As of the Chapter 15 filing, the debtor’s center of main interest was the Cayman Islands and therefore its provisional liquidation was a foreign main proceeding.
Nevertheless, Solyndra argued that the provisional liquidators shifted the debtor’s center of main interest in bad faith. The court disagreed finding that the steps taken by the provisional liquidators were consistent with their order of appointment and their roles as provisional liquidators. Indeed, according to the court, the provisional liquidators would have likely taken these steps regardless of their intention to file a Chapter 15 case.
A foreign representative of a foreign company, including an offshore exempted company, that has minimal operations in the offshore jurisdiction or connections to the United States may nevertheless be able to obtain recognition and relief under Chapter 15. Before embarking on a Chapter 15 case, a foreign representative should take all possible steps to ensure that all the requirements for recognition are satisfied. In certain instances, this may require actions in both the foreign jurisdiction and the United States.