Chapter 15 protection granted

US court recognises Cayman liquidation proceedings

In contrast to earlier court
rulings, a recent decision by the US Bankruptcy Court for the State of Delaware
granted bankruptcy protection over the US assets of a Cayman Islands exempted
company that is in liquidation.

In the current case Saad
Investments Finance Company (No.5) Limited, a fund of funds that invested in
several private equity funds and one hedge fund, was subject to a winding up
order by the Cayman Islands Grand Court which appointed two joint official
liquidators in September 2009.

In order to gain more time to
maximise the value of SIFCO5’s US assets and effectively liquidate them, the
liquidators, Geoffrey
Varga and Nicolas Matthews of Kinetic Partners, sought
recognition of the Cayman liquidation and winding up proceedings under chapter
15 of the US Bankruptcy Code in a US Court.

Chapter 15 is designed to deal with cross-border
insolvencies. Under certain circumstances it allows for protection over the
foreign debtor and its US assets in the interest of creditors, the debtor and
other interested parties. This includes for example an automatic stay of
proceedings preventing creditors from collecting debt.

The US court can grant recognition
of the foreign liquidation proceedings, if these take place in the debtor’s
centre of main interest, which unless there is evidence to the contrary is the
debtor’s registered office.

 In the case of SIFCO5 the liquidators argued
that in addition to the registered office being situated in the Cayman Islands,
no management, administrative or operational functions would take place outside
the Cayman Islands and that the majority of SIFCO5’s investments were in Cayman
Islands funds.

Moreover, the equity holders in
SIFCO5 are Saad Investment Company Limited, which itself is under liquidation
in Cayman, and Barclays Bank, which commenced the winding up proceedings against
SIFCO5 in the Cayman Islands.

The court found that SIFCO5 had its
centre of interest in the Cayman Islands and recognised the Cayman proceedings as
a foreign main proceeding.

As a result the court issued an
order preventing parties from commencing any judicial and administrative actions
or proceedings in the US against the liquidators, SIFCO5 or its US assets.

The court recognised the
liquidators as the exclusive representatives of SIFCO5 in the US and allowed
them to dispose of SIFCO5’s US assets and make capital calls relating to the
assets.

The
liquidiator’s legal representatives Schulte Roth & Zabel commented that “although each case is decided upon its own merits and facts, the
result in SIFCO5 should be welcome news to investors, managers, administrators,
liquidators and receivers of these types of entities in foreign insolvency
proceedings.”

It showed that
earlier decisions have not necessarily closed the door to obtaining the
assistance of US courts in connection with the liquidation of offshore
entities, the law firm said in a news alert.