Issues Faced in Insolvencies

Issues Faced inInsolvencies

Moderator:J Ross McDonough

17 Jan 2014

Liquidation Funding

• General trends since 2008

• What we don't have in Cayman:⁻ DIP financing (at least of the type available in the US and

absent parallel Ch. 11 proceedings)

⁻ Contingency (i.e. no win-no fee) fee arrangements for lawyers (at least for proceedings pursued in Cayman)

⁻ The ability to bring recovery actions without the risk of adverse costs orders

Liquidation Funding

• What we do have in Cayman:

Restructuring provisional liquidations:⁻ DIP financing can be provided where there are parallel Ch. 11

proceedings and with a Cayman validation order (eg Arcapita)

⁻ Absent parallel Ch. 11 proceedings working capital can still be provided on a secured basis with a Cayman validation order, but the market and process is much less developed

Liquidation Funding

Official liquidations:⁻Sale of the company’s litigation claims, often in consideration for the estate receiving a percentage of any recoveries made by the purchaser

⁻General liquidation or specific litigation funding, typically on terms where the lender receives principal, interest and a percentage of any recoveries made by the estate (but beware of champerty)

⁻Liquidators being remunerated based on a percentage of realisations and/or distributions

⁻Contingency fee arrangements where the litigation is to be brought in the US (eg SPhinX; AJW)

⁻Conditional fee arrangements where the litigation is to be brought in Cayman (eg DD Growth Premium 2X Fund)

• Overview Indemnification commonly given to: Auditors,

Advisors, Directors, Administrators, Brokers

• Dynamics introduced to a liquidation Ranking, Quantification, Timing, Litigation

• Principles of reserving for indemnities “Just Estimate” – §139 High Degree of Assurance - (SPhinX)

• Practicalities in estimating a reserve Legal Costs, Damages Rogue Claims, Contribution

• Resolving indemnities Insurance, Distribution Plans, Settlements

• Other considerations CFA arrangements Jurisdictional Differences

© 2013 Grant Thornton Specialist Services (Cayman) Limited. All rights reserved.

Information gathering by liquidators

• Liquidators' powers under Cayman law limited to:– "relevant persons" (definition) – deliver up company's property &

documents, examination and interrogatories

• Enforcement against non resident parties?• Cross border options – using foreign law

– statutory provisions/ regulatory

– discovery

– ancillary insolvency proceedings

– common law

• The Saad "Bermuda" cases– background

– respective outcomes (pending appeal to Privy Council) and rationale – ancillary proceedings, common law relief

Chapter 15:COMI and Recognition

• The “Black Box” and the “Eclipse of Comity”. • The Fairfield Sentry “workaround” Bear Stearns relies on first

gaining “traction” over time in the foreign main proceeding. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007), aff’d 389 B.R. 325 (2008); In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010), aff’d 2013 WL 1593348 (2d Cir. Apr. 16, 2013).

• Fairfield Sentry no panacea: • No time to gain traction in some instances. • Fairfield Sentry still at risk / may not be followed more widely.• UNCITRAL ‘s new revision to Guide to Enactment to the Model Law is

that COMI fixed as of date foreign main proceeding filed.

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SATTERLEE STEPHENS BURKE & BURKE LLP • NEW YORK

CHAPTER 15:

The (Continued) Eclipse of Comity

• Recognition being interpreted as a question of authority. • Where recognition lacking / impossible / pending,

foreign representatives can be denied all assistance in the US.Reserve Int’l Liquidity Fund v. Caxton, 2010 WL 1779282 (S.D.N.Y. Apr. 29, 2010).

• More cross-border chaos and competing fiduciaries:• “Blocking” plenary cases filed in the United States.• Fletcher is one such case as are its “cousin” Soundview cases. • Automatic Stay held to stymie offshore office-holders.

9SATTERLEE STEPHENS BURKE & BURKE LLP • NEW YORK

Chapter 15Drawbridge / Barnet

• Drawbridge problem arises outside the Model Law context.• Second Circuit held chapter 11 “debtor” requirements = chapter 15

“debtor” requirements• Chapter 15 “debtor” must have a domicile or property in the US. Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 2013 WL 6482499 (2d Cir. Dec. 11, 2013).

• US domestic bankruptcy law undermines Chapter 15:• Some entities could not possibly meet section 109(a).• Some JOLs only wish to conduct discovery in the US.• Could mean rise in “orphaned” non-recognized foreign proceedings.

• Problematic as New York a favored venue for Chapter 15 practice• Drawbridge mandatory precedent for New York’s bankruptcy court. • Second Circuit also influential beyond its borders.

• Rationale: 28 U.S.C. 1728(a) discovery in aid of foreign proceedings remains available for office holders.

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SATTERLEE STEPHENS BURKE & BURKE LLP • NEW YORK

Thank You

Questions?