[Co-Author: Helen Yan, Law Clerk]

Judge David S. Jones of the United States Bankruptcy Court for the Southern District of New York (Bankruptcy Court) recently denied Chapter 15 recognition of a Cayman Islands proceeding (Cayman Proceeding) in which the Cayman Court appointed joint provisional liquidators (JPLs) to displace the board of directors of Global Cord Blood Corporation (GCBC). Notwithstanding that U.S. bankruptcy courts routinely recognize Cayman proceedings involving JPLs, the Bankruptcy Court found that this particular proceeding was not a “collective proceeding” commenced “for the purpose of reorganization or liquidation,” and therefore was not a “foreign proceeding” as defined in the U.S. Bankruptcy Code.

In denying recognition, the Bankruptcy Court noted that the objectives of Chapter 15—which are clearly expressed in the Bankruptcy Code—relate to facilitating cooperation between U.S. courts and foreign authorities in connection with cross-border insolvency proceedings. That statutory emphasis limits Chapter 15 assistance to creditor-focused foreign proceedings that involve insolvency, reorganization, or liquidation.

Background

GCBC is a Cayman Islands company trading on the New York Stock Exchange that collects and stores umbilical cord blood. One of GCBC’s shareholders, Blue Ocean Investment (BVI) Company Limited (Blue Ocean), initiated the Cayman Proceeding by filing a “winding up petition” seeking to block GCBC’s acquisition of a company called Cellenkos in a transaction (Transaction) that included the transfer by GCBC of millions of shares of new stock and $600 million in corporate funds. Blue Ocean alleged that the GCBC directors approved the Transaction with insufficient notice to shareholders, were self-interested, and engaged in acts of forgery in furtherance of the Transaction. Citing relevant sections of the Cayman Islands Companies Act (Companies Act), Blue Ocean petitioned to enjoin the Transaction and remove the current Board, or in the alternative, to wind up GCBC. In August 2022, Blue Ocean filed a summons seeking the appointment of JPLs.

The Cayman Court granted the appointment of the JPLs. The appointment order vested the JPLs with powers to protect and prevent misuse of GCBC’s assets, to investigate GCBC’s affairs, to act as fiduciaries of GCBC in the place of incumbent management, and to commence any insolvency process in the Cayman Islands or in any other country.

The JPLs filed a Chapter 15 Petition in the Bankruptcy Court, seeking Chapter 15 recognition of the Cayman Proceeding as a “foreign main proceeding,” intending to utilize provisions of Chapter 15 that allow for the foreign representative to examine witnesses and take evidence under United States discovery rules. GCBC’s displaced former directors and another shareholder entity opposed the JPLs’ petition for recognition on the ground that the Cayman Proceeding did not constitute a “foreign proceeding” as defined by section 101(23) of the Bankruptcy Code.

Discussion

To be eligible for recognition under Chapter 15, a proceeding must satisfy all seven “definitional elements” of a “foreign proceeding” found in section 101(23) of the Bankruptcy Code. With respect to the Cayman Proceeding, three of those seven elements were in dispute: whether the proceeding was (1) “collective in nature,” (2) “authorized or conducted under a law related to insolvency or the adjustment of debts,” and (3) “for the purpose of reorganization or liquidation.” After considering the evidence, the Bankruptcy Court found that the JPLs had not shown that the Cayman Proceeding was “collective” or for the purpose of reorganization or liquidation.

At the hearing on recognition, the JPLs acknowledged that the Cayman Proceeding did not seek to identify GCBC’s creditors, quantify or classify any claims, determine a scheme of asset distribution, or even give formal notice to creditors. Nevertheless, the JPLs argued that the Cayman Proceeding involved collective action because it sought to benefit the corporation and incidentally its shareholders and creditors at large. Looking to both prior case law and the statutory Chapter 15 objectives, the Bankruptcy Court rejected this argument, finding that the hallmarks of “collective” proceedings are direct creditor involvement in a process that considers the rights of all creditors and includes aspects such as review and consideration of claims and distribution of assets. Although acknowledging that Chapter 15 relief is to be “broadly construed,” the Bankruptcy Court found that the Cayman Proceeding exceeded the bounds of anything that could be considered a “collective” proceeding within the meaning of the Bankruptcy Code because nothing about the Cayman Proceeding was “specifically oriented toward creditors.”

With respect to the second disputed element, the Bankruptcy Court held, in the JPLs’ favor, that the Cayman Proceeding arose “under a law relating to insolvency or adjustment of debt.” The Bankruptcy Court found that this element focuses only on the law applicable to the proceeding, and not on any particular activities occurring in the proceeding. Further, the element should be applied flexibly because the relevant law need only “relate to” insolvency or adjustment of debt. The Cayman Proceeding was commenced under the Companies Act, which is a comprehensive statute that includes provisions relating to both general corporate governance and the winding up of insolvent entities. Accordingly, even though the JPLs had not initiated any winding up process or invoked any of the Companies Act’s insolvency provisions, the Bankruptcy Court found that the element was satisfied because the Companies Act, as a whole, undeniably “relates to” insolvency.

Finally, the Bankruptcy Court determined that the Cayman Proceeding was not “for the purpose of reorganization or liquidation,” as required to satisfy section 101(23). The Court viewed it “fatal” to the satisfaction of this requirement that, although the order appointing the JPLs authorized them to do so, the JPLs had not commenced any winding up process or liquidation effort. In particular, the Court concluded that the mere possibility that a liquidation might occur in the future was insufficient to make liquidation the purpose of the proceeding, nor could activities related to corporate governance and fraud remediation such as investigating misconduct and recovering corporate assets be categorized as a “reorganization.” The Bankruptcy Court concluded that its determination was supported by the United Nations Commission on International Trade Law Enactment Guide, which stated in relevant part: a proceeding that otherwise “satisf[ies] certain elements of the definition of foreign proceeding . . . may nevertheless be ineligible for recognition because they are not for the stated purpose of reorganization or liquidation.”

Because the Cayman Proceeding failed to meet two of the seven elements of the Bankruptcy Code’s definition of “foreign proceeding,” the Bankruptcy Court denied recognition of the proceeding.

Takeaways

U.S. bankruptcy courts routinely grant Chapter 15 recognition to proceedings brought in certain jurisdictions, including Cayman proceedings commenced under the Companies Act. The mere fact that a proceeding is pending in a favored jurisdiction, however, does not mean that bankruptcy courts will engage in a “rubber stamp exercise” with respect to recognition. Further, while U.S. bankruptcy courts construe the requirements of section 101(23) broadly, such flexibility is not limitless. To be eligible for recognition, all proceedings must directly concern creditor issues, involve creditors in the process, and include reorganization or liquidation activities. Bankruptcy courts will hold a foreign representative to his or her burden of proving that these circumstances exist, regardless of the foreign jurisdiction.

The opinion is available here.