Following the 2006 decision of Judge Drain of the U.S. Bankruptcy Court for the Southern District of New York in the case of In re SPhinX Ltd., et al,1 ("SPhinX"), there was justifiable cause for concern amongst Cayman Islands-based insolvency practitioners with respect to the recognition of Cayman mutual fund liquidations in the U.S.

In SPhinX, Judge Drain had refused to recognise a Cayman Islands Official Liquidation as a "foreign main proceeding" within the meaning of Chapter 15 of the U.S. Bankruptcy Code ("Chapter 15"). This decision cast doubt on whether the U.S. Courts were likely to recognise Cayman proceedings following changes to the U.S. Bankruptcy Code.

Those concerns appeared to have been ameliorated, at least in part, by the decision of Judge Drain in the case of Amerindo Internet Growth Fund Ltd ("Amerindo") on 5 March 2007. In Amerindo, Judge Drain did not consider it necessary to publish written reasons but was content to recognise the Cayman liquidation as a foreign main proceeding within the meaning of Chapter 15.  It should be noted that there were several distinguishing features between the liquidations in SPhinX and Amerindo, the most important of which was that in Amerindo, the liquidators could show a much stronger connection to the Cayman Islands (other than the mere fact of the subject fund being registered there).  In Amerindo, the Administrator maintained and stored Amerindo's books and records in the Cayman Islands and, in turn, the books and records were audited by Cayman Islands-based accountants.

On 30 August 2007, on similar applications for recognition brought by the provisional liquidators of Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Master Fund and Bear Stearns High Grade Structured Credit Strategies Master Fund2 ("the Bear Funds"), Judge Lifland, also sitting in the U.S. Bankruptcy Court for the Southern District of New York, declined to recognise either of the Cayman Islands proceedings as either foreign main or non-main proceedings. In rejecting the applications for recognition as foreign main proceedings, Judge Lifland found that the Bear Funds' centre of main interest was located in the United States. He then considered whether to recognise the Cayman proceedings as foreign non-main proceedings. He declined to do so, finding, on the facts before him, that there was no "establishment" in the Cayman Islands for the conduct of non-transitory economic activity. This decision is now the subject of an appeal.

It is likely that the U.S. Bankruptcy Court for the Southern District of New York may well rule on yet another such application for Chapter 15 recognition before the appeal of Judge Lifland's ruling is determined. On the same day that Judge Lifland handed down his ruling, the provisional liquidators of another Cayman Islands' mutual fund, Basis Yield Alpha Fund (Master) filed a petition for Chapter 15 recognition3. This case has been assigned to Judge Robert E. Gerber.

In an Order made on 12 September 2007, Judge Gerber set out twenty one factors which the provisional liquidators are to address in their evidence, which will be considered by the Court at the substantive hearing of the application for recognition. These factors include the jurisdiction of organisation or registration of the fund, the extent of the fund's qualification to do business in foreign jurisdictions, where the fund maintains offices and the functions carried out at such offices, details of personnel employed directly or indirectly by the fund, the extent to which other entities exercise managerial control over the fund's operations and their location, the place where investment management is conducted, the location where administrative or back-office functions are undertaken, location of assets and approximate value, identity and location of board and location of physical meetings, number and location of creditors and equity investors, extent to which the fund has or had contractual agreements with entities organised in the Cayman Islands or which have offices in or employ residents of the Cayman Islands, location of financial records, and the nature and extent of non-transitory economic activity in the Cayman Islands.

The substantive hearing in the Basis recognition proceedings is scheduled for 19-20 November 2007.


A significant practical effect of successfully obtaining recognition of a Cayman Islands' liquidation as a foreign main proceeding is the grant of an automatic stay with respect to the debtor and the property of the debtor that is within the United States. If recognition is only granted as a foreign non-main proceeding, relief may still be granted under Chapter 15 to avoid proceedings against the debtor and to protect the assets, but it is a matter for the US Bankruptcy Court's discretion. If no recognition is granted, Cayman Islands' liquidators are left with a choice between availing themselves of a more substantive procedure under Chapters 7 or 11 of the Bankruptcy Code or leaving U.S.-located assets at risk of seizure by creditors.

Global Importance

Given the impact that these decisions have, not just on the recognition of Cayman Islands' proceedings, but of any foreign insolvency proceedings by the U.S. Bankruptcy Court, these proceedings will be followed closely by lawyers and insolvency practitioners around the world. The attorneys at Walkers, who acted for each of the funds referred to above in their Cayman Islands proceedings, will be particularly interested in the outcomes.

1. Case # 06-11760

2. Case # 07-12383 and 07-12384

3. Case # 07-12762

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.