Since the 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, Chapter 15, Case No. 06-11760 ("SPhinX") in mid-2006, there has been justifiable cause for concern amongst Cayman Islands-based insolvency practitioners with respect to the recognition of Cayman liquidations in the U.S.
The SPhinX 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 have now been ameliorated, at least in part, by the decision of Judge Drain in the case of Amerindo Internet Growth Fund Ltd (In Liquidation) ("Amerindo") on 5 March 2007.
In SPhinX, Judge Drain had refused to grant recognition of a Cayman Islands Official Liquidation as a "foreign main proceeding" within the meaning of Chapter 15 of the U.S. Bankruptcy Code ("Chapter 15"). In SPhinX, the Court deviated from the objective standards set out in Chapter 15 for determination of whether a foreign proceeding ought to be recognised as "main" or "non-main". Instead, the Court looked to subjective matters such as the purpose for which the application was made, and declined to grant recognition on the basis that the underlying purpose of the application had been improper (such matters were relevant under the previous section 304 regime, but do not apply to applications under the new section 1502 regime).
Impact in Cayman
The SPhinX decision was troubling to Cayman Islands-based insolvency practitioners, as an application for recognition by the U.S. Courts of a Cayman liquidation is often a crucial step in conducting the liquidation (as the subject companies and funds so often have significant cross-border connections to the U.S.). Of course, the main practical effect of successfully obtaining an order that a Cayman liquidation is recognised as a foreign main proceeding is that the liquidators are then availed of the right to an automatic stay with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the U.S.
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 Cayman (other than the mere fact of the subject funds being registered there). In Amerindo, the Administrator maintained and stored Amerindo's books and records in Cayman and, in turn, the books and records were audited by a Cayman Islands-based auditing firm.
Whilst it is likely these factors were important in persuading Judge Drain that Amerindo had the "centre of its main interests" in Cayman and accordingly ought to be recognised as a foreign main proceeding for the purposes of Chapter 15, in the absence of a written judgment it is not possible to be certain of the Court's reasoning. However, the decision is an important step towards restoring the status quo with respect to recognition of Cayman liquidations as foreign main proceedings under the U.S. Bankruptcy regime and should go a long way towards reassuring practitioners who may need to bring similar applications in the future.
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