In In re Global Cord Blood Corp., 2022 WL 17478530 (Bankr. S.D.N.Y. Dec. 5, 2022), the U.S. Bankruptcy Court for the Southern District of New York denied without prejudice a petition filed by the joint provisional liquidators for recognition of a "winding-up" proceeding commenced under Cayman Islands law. Contrary to the "winding-up" phrase associated with the applicable Cayman statute, however, the joint provisional liquidators were appointed only for the purposes of investigating allegations that a Cayman company's board and/or officers caused or allowed an improper expenditure of more than $600 million of corporate funds and preventing further dissipation of the company's assets. According to the court, chapter 15 recognition was unwarranted because the proceeding was more akin to a corporate governance and fraud remediation effort rather than a proceeding that considers the rights and objectives of a company's creditors in the context of a court-supervised insolvency, reorganization, or liquidation proceeding.
To rule otherwise, the bankruptcy court wrote, "would be to invite recourse to U.S. bankruptcy courts whenever any foreign corporation sustains losses as a result of officer or director fraud or defalcation, so long as that corporation first commences proceedings in its home jurisdiction seeking to install new fiduciaries and right the wrong that the corporation has suffered." The court further explained that, although Cayman law generally establishes standards and procedures for the liquidation or winding up of insolvent companies, no such liquidation was underway when the provisional liquidators filed their chapter 15 petition, which was "fatal" to their request for chapter 15 recognition and related relief.
Procedures, Recognition, and Relief Under Chapter 15
Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which has been enacted in some form by more than 50 countries.
Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts.
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."
The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. § 1502(4))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c).
An "establishment" is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." Unlike with the determination of COMI, there is no statutory presumption regarding the determination of whether a foreign debtor has an establishment in any particular location. SeeIn re British Am. Ins. Co., 425 B.R. 884, 915 (Bankr. S.D. Fla. 2010). Furthermore, "nontransitory economic activity" generally means more than merely holding board meetings, retaining local corporate counsel, and maintaining a postage address. See In re Modern Land (China) Co., Ltd., 641 B.R. 768, 786 (Bankr. S.D.N.Y. 2022).
For purposes of the "foreign proceeding" definition quoted above, a "collective judicial or administrative proceeding" is a proceeding that considers the rights and obligations of creditors generally, rather than a proceeding instituted for the benefit of a single creditor or class of creditors. SeeArmada (Singapore) Pte Ltd. (In re Ashapura Minechem Ltd.), 480 B.R. 129, 136 (S.D.N.Y. 2012); British American, 425 B.R. at 902; In re Betcorp Ltd., 400 B.R. 266, 281 (Bankr. D. Nev. 2009).
Such a proceeding "contemplates the consideration and eventual treatment of claims of various types of creditors, as well as the possibility that creditors may take part in the foreign action." British American, 425 B.R. at 902. A collective proceeding is "designed to provide equitable treatment to creditors, by treating similarly situated creditors in the same way, and to maximize the value of the debtor's assets for the benefit of all creditors." Ashapura, 480 B.R. at 136-37 (citation omitted). Other hallmarks of a collective proceeding include adequate notice to creditors, provisions for the distribution of assets in accordance with statutory priorities, and a mechanism for creditors to seek court review of developments. Id. at 137; In reABC Learning Centers Ltd., 445 B.R. 318, 328-29 (Bankr. D. Del. 2010); British American, 425 B.R. at 902.
In assessing whether a proceeding is collective, a court should examine "both the law governing the foreign action and the parameters of the particular proceeding as defined in, for example, orders of a foreign tribunal overseeing the action." British American, 425 B.R. at 902.
Some courts construing section 101(23) have required a party seeking chapter 15 recognition of a purported "foreign proceeding" to establish seven criteria or elements (the "FP Criteria"):
(i) [the existence of] a proceeding; (ii) that is either judicial or administrative; (iii) that is collective in nature; (iv) that is in a foreign country; (v) that is authorized or conducted under a law related to insolvency or the adjustment of debts; (vi) in which the debtor's assets and affairs are subject to the control or supervision of a foreign court; and (vii) which proceeding is for the purpose of reorganization or liquidation.
Betcorp, 400 B.R. at 277; accord In re ENNIA Caribe Holding N.V., 594 B.R. 631, 638 (Bankr. S.D.N.Y. 2018); Ashapura, 480 B.R. at 136.
Section 1509(b) provides that, if the U.S. bankruptcy court recognizes a foreign proceeding, the foreign representative may apply directly to another U.S. court for appropriate relief, and a U.S. court "shall grant comity or cooperation to the foreign representative."
In addition, after recognition of a foreign proceeding, section 1521(a) authorizes the bankruptcy court, upon the request of the foreign representative, to grant a broad range of relief designed to preserve the foreign debtor's assets or "the interests of creditors." Such post-recognition relief "is largely discretionary and turns on subjective factors that embody principles of comity." In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 329 B.R. 325, 333 (S.D.N.Y. 2008).
However, section 1522(a) provides that the bankruptcy court may grant relief under section 1521 "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."
Similar to section 1521(a), section 1507 of the Bankruptcy Code states that, post-recognition, the court may provide "additional assistance" to a foreign representative under the Bankruptcy Code "or under other laws of the United States." In determining whether to provide such relief, the court must consider whether such assistance, "consistent with the principles of comity," will reasonably ensure, among other things: (i) just treatment of all creditors and interest holders; (ii) protection of U.S. creditors "against prejudice and inconvenience in the processing of claims in such foreign proceeding"; and (iii) "distribution of proceeds of the debtor's property substantially in accordance with the order prescribed" in the Bankruptcy Code.
Section 1506 of the Bankruptcy Code sets forth a public policy exception to the relief otherwise authorized in chapter 15, providing that "[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States."
Global Cord Blood Corp. ("GCBC") was a Cayman Islands biotechnology company headquartered in Hong Kong that operated primarily in the People's Republic of China. Its shares were traded on the New York Stock Exchange. Two entities—Golden Meditech Stem Cells (BVI) Co. Ltd. ("Golden Med") and Blue Ocean Structure Investment (BVI) Co. Ltd. ("Blue Ocean")—asserted conflicting claims to the ownership of GCBC. That dispute was the subject of ongoing litigation (the "BVI Proceeding") filed in the British Virgin Islands ("BVI").
In April 2022, GCBC, at the direction of certain of its directors and officers, agreed to a transaction whereby it would transfer millions of new shares of stock and more than $600 million to start-up clinical biotechnology company Cellenkos, Inc. and another entity (collectively, "Cellenkos"). In an effort to stop what it alleged to be a fraudulent transaction, Blue Ocean filed a winding-up petition against GCBC on May 5, 2022, in a Cayman court (the "Cayman Proceeding").
In its winding-up petition, Blue Ocean sought an order of the Cayman court preventing GCBC from proceeding with the Cellenkos transaction. It also requested an order requiring, among other things, that a shareholder meeting be convened to remove GCBC's board of directors and that GCBC's articles of association be amended to limit the authority of the board to approve any change in control of the company.
Alternatively, Blue Ocean requested that GCBC be wound up under section 92(e) of the Cayman Islands Company Act (the "CCA"), which authorizes the Cayman court to wind up a company if the court "is of the opinion that it is just and equitable that the company should be wound up." Section 92(e) does not refer to or require insolvency as a basis for winding up a company, nor does it provide for the classification, adjustment, or resolution of specific debts. By contrast, section 92(d) of the CCA—which Blue Ocean did not invoke in its petition—empowers the Cayman court to wind up a company if "the company is unable to pay its debts."
As an additional form of alternative relief, Blue Ocean requested that the Cayman court appoint joint official liquidators empowered to carry out the winding-up process. It later sought an order under section 104(2) of the CCA for the immediate appointment of provisional liquidators for GCBC instead, claiming that the appointment was necessary to prevent spoliation or misuse of corporate assets, corporate mismanagement, and oppression of minority shareholders.
Section 104(2) of the CCA does not mention or require any showing of insolvency. By contrast, section 104(3) of the CCA—which was not cited in Blue Ocean's petition—authorizes the ex parte appointment of a provisional liquidator on the grounds that "the company is or is likely to become unable to pay its debts" and "intends to present a compromise or arrangement to its creditors."
In May 2022, the Cayman court enjoined the closing of the Cellenkos transaction, but lifted the injunction shortly afterward based on GCBC's representation that the transaction had already been partially completed. Those representations turned out to be false.
In July 2022, Blue Ocean commenced litigation in a Texas federal district court seeking discovery from Cellenkos pursuant to 28 U.S.C. § 1782 (aptly titled "Assistance to foreign and international tribunals and to litigants before such tribunals") for use in the Cayman Proceeding and the BVI Proceeding. The district court granted Blue Ocean's application.
In September 2022, Blue Ocean filed an amended winding-up petition in the Cayman Proceeding alleging that GCBC proceeded with the Cellenkos transaction without proper notice or authorization, that the acquisition was for a vastly inflated price, that the transaction improperly benefited corporate insiders, and that GCBC's directors breached their fiduciary duties in approving it.
On September 22, 2022, the Cayman court entered an order appointing joint provisional liquidators (the "JPLs") for GCBC pursuant to section 104(2) of the CCA. Among other things, that order:
- Directed the JPLs to take steps to preserve and prevent the dissipation of GCBC's assets;
- Directed the JPLs to investigate and report on GCBC's worldwide affairs;
- Authorized the JPLs to collect GCBC's assets and take steps to discharge the company's obligations;
- Suspended the powers of GCBC's board, unless and until such powers were restored by the JPLs;
- Imposed a moratorium on all acts to collect GCBC's debts;
- Authorized the JPLs to commence winding-up or insolvency proceedings for GCBC in the Caymans or elsewhere; and
- Authorized the JPLs to take whatever steps were necessary to obtain recognition of their appointment in China, Hong Kong, or "any other relevant jurisdiction and to make applications to the courts of such jurisdictions for that purpose or for the purpose of obtaining information to assist them in their investigations."
Although authorized to do so, the JPLs never commenced winding-up or insolvency proceedings for GCBC and took the position that the company was solvent.
In October 2022, the JPLs filed a petition seeking chapter 15 recognition of the Cayman Proceeding as a foreign main or nonmain proceeding. The petition also requested relief under section 1521(a) of the Bankruptcy Code, including the ability to examine witnesses and gather evidence.
Golden Med opposed recognition, arguing that the Cayman Proceeding did not qualify as a "foreign proceeding" eligible for chapter 15 recognition because the Cayman Proceeding was brought under the CCA's "just and equitable" provisions, rather than its provisions relating to the adjustment or satisfaction of GCBC's debts, the liquidation or winding up of the company, or the implementation of a scheme of arrangement to resolve its debts.
The Bankruptcy Court's Ruling
The U.S. bankruptcy court denied the petition for chapter 15 recognition.
According to U.S. Bankruptcy Judge David S. Jones, although the parties did not dispute that the JPLs were a "person or body" within the meaning of section 1517 of the Bankruptcy Code, there was a "serious question" regarding whether the Cayman Proceeding was a "collective judicial or administrative proceeding," and therefore qualified as a "foreign proceeding," as that term is defined in section 101(23). He explained that a broad construction of foreign proceedings eligible for chapter 15 recognition "helps ensure that other nations using varied approaches in addressing insolvencies will receive the assistance of U.S. courts." Global Cord, 2022 WL 17478530, at *6. However, Judge Jones noted, "the resulting flexibility is not limitless" and must be guided by the language of the statutory provision. Id.
Judge Jones noted that three of the FP Criteria were disputed in the case before him—namely, whether the Cayman Proceeding was: (i) a "collective proceeding"; (ii) commenced "under a law relating to insolvency or adjustment of debt" that provided for a foreign court's control of a debtor's assets; and (iii) commenced "for the purpose of reorganization or liquidation." He found that two of these three criteria were not satisfied, and that chapter 15 recognition of the Cayman Proceeding must therefore be denied.
First, Judge Jones found that the Cayman Proceeding was not a collective proceeding. Among other things, he explained, creditors were not given notice of, or standing to participate in, the Cayman Proceeding, nor was there any effort to identify, classify, or satisfy creditor claims—a "reality [that] distinguishes every prior case that the Court or the parties have identified that courts concluded involved 'collective' action." Id. at *7. Judge Jones further emphasized that, although the JPLs had been authorized to wind up GCBC, no such winding-up process was underway.
The JPLs argued that the Cayman Proceeding qualified as a "collective proceeding" despite the absence of creditor participation because the proceeding sought "to benefit the corporation as a whole and all of its constituencies," rather than representing a receivership or other collection effort undertaken on behalf of single creditor or group of creditors. They also claimed that creditor participation and the filing of creditor claims was unnecessary because GCBC was solvent and likely able to pay all of its creditors and shareholders. Judge Jones rejected these arguments, writing that "[a]ll relevant caselaw … unequivocally and at length invokes a focus on and involvement of 'creditors' as the main definitional hallmark of 'collective' action within the meaning of section 101(23)." Id. at *8.
Second, the bankruptcy court concluded that the Cayman Proceeding did arise "under a law relating to insolvency or adjustment of debt." According to Judge Jones, although the predicates for relief under the CCA in Blue Ocean's winding-up petition did not address insolvency or winding up, the CCA "is a comprehensive statute dealing with multiple questions relating to corporations, including both general corporate governance and remedies for varied types of corporate malfeasance, and insolvencies and the winding up of insolvent entities." Id. at *9. The relevant test, he explained, is not whether a foreign proceeding involves insolvency or adjustment of debts, but instead, whether the law under which a proceeding is commenced relates to insolvency or adjustment of debt.
Third, the bankruptcy court determined that the Cayman Proceeding was not commenced "for the purpose of reorganization or liquidation." Even though U.S. bankruptcy courts routinely recognize proceedings under the CCA, Judge Jones explained, such proceedings have "in one way or another, directly concerned creditor issues, entity debts, or a winding up or liquidation of the company in question." Id. at *10. That was not the case here, he noted, and "the mere possibility that a liquidation could occur down the road is not sufficient to make the 'purpose' of the Cayman Proceeding the 'liquidation' of [GCBC] or its affairs," nor did the Cayman Proceeding represent a corporate "reorganization" because it involved the removal of GCBC's board and the transfer of control to the JPLs. Id. at *11.
This conclusion, Judge Jones wrote, is supported by the guide to the enactment of the Model Law, which identifies certain types of proceedings that might satisfy certain elements of the definition of "foreign proceeding," but would be ineligible for recognition "because they are not for the stated purpose of reorganization or liquidation," or were commenced to prevent dissipation, waste, or detriment to investors, "rather than to liquidate or reorganize [an] insolvency estate." Id. at *12 (quoting Guide to the Enactment of the Model Law (2014) ¶ 77).
Finally, the bankruptcy court rejected the JPLs' argument that recognition of the Cayman Proceeding was warranted even though GCBC was not insolvent because, according to the court in In re Millard, 501 B.R. 644 (Bankr. S.D.N.Y. 2013), and a leading commentator, "insolvency need not be proved to proceed under Chapter 15, [and] solvent petitioners in financial distress can be eligible for Chapter 15 relief." Id. Judge Jones explained that Millard was inapposite because the court expressly rejected this approach, and the case involved a CCA proceeding commenced for the purpose of reorganization and/or debt adjustment.
Golden Cord is instructive concerning the kinds of foreign proceedings that a U.S. bankruptcy court can and cannot recognize under chapter 15. Judge Jones hewed close to the express language and purpose of chapter 15 (i.e., a means for U.S. courts to cooperate with foreign tribunals presiding over foreign bankruptcy, insolvency, and restructuring proceedings that address the rights and objectives of creditors). The bankruptcy court concluded that, because the winding-up proceeding filed by a controlling shareholder against the company was not commenced for such a purpose, but instead as a vehicle to investigate possible fraud and breach of fiduciary duty, and to prevent the fraudulent dissipation of company assets, the proceeding was not eligible for chapter 15 recognition.
Notably, the bankruptcy court rejected the idea that a foreign debtor must be insolvent to be eligible for chapter 15 recognition. Instead, according to the court, the inquiry focuses on whether the foreign proceeding is collective because, among other things, it involves creditor participation in a process designed to resolve creditor claims.