The Model (Law) Collective: No foreign recognition for provisional liquidators without collective proceedings
In Re Global Cord Blood Corporation (SDNY, 2022), the US Bankruptcy Court reinforced the basic premise that foreign office holders seeking recognition under Chapter 15 of the US Bankruptcy Code must have been appointed in respect of collective insolvency or debt adjustment proceedings. This excludes provisional liquidators appointed for corporate mismanagement and asset preservation purposes over otherwise solvent companies.
In September 2022, the Grand Court of the Cayman Islands appointed joint provisional liquidators (JPLs) to Global Cord Blood Corporation under s104 of the Companies Act (2022 Revision) to prevent misconduct, mismanagement and the dissipation or misuse of assets. The underlying proceedings in Cayman Islands were based on a winding up petition on the just and equitable ground. There were no allegations of insolvency. The JPLs subsequently sought Chapter 15 recognition for relief including the ability to examine witnesses and take evidence.
Chapter 15 incorporates the Model Law on Cross-Border Insolvency (Model Law) into US domestic legislation to provide effective mechanisms for dealing with cross-border insolvencies; consistent with the underlying tenet of the Model Law to have a single insolvency proceeding extending on a worldwide basis.
Chapter 15 recognition applications to the US are usually made by offshore “light touch” provisional liquidators appointed for the purposes of rescuing of an insolvent debtor via a restructuring. The US Courts have proven flexible in recognising foreign appointees under Chapter 15 where to do so would result in the best outcome for creditors, whether via foreign main or non-main proceedings. The JPLs application, however, “test[ed] the limits of how broadly Chapter 15 can be applied to assist a foreign court in its conduct of a case that does not involve insolvency or the identification, classification, or satisfaction of debts”.
The Bankruptcy Code defines ‘foreign proceeding’ as “a collective … proceeding in a foreign country … under a law relating to insolvency or adjustment of debt … for the purpose of reorganisation or liquidation”. Collective meaning for the benefit of creditors generally, not for the benefit of the corporation as a whole.
Given there were no creditors and no insolvency or restructuring proceedings at play, the Cayman Islands proceedings fell outside of the Bankruptcy Code’s definition of a ‘foreign proceeding’ and was ineligible for recognition. Instead, the Bankruptcy Court concluded that “the Cayman Proceeding … is most akin to a corporate governance and fraud remediation effort, and is not a collective proceeding for the purpose of dealing with insolvency, reorganisation, or liquidation”.
This decision shows that the concept of modified universalism and Model Law-inspired legislation will not be expanded beyond insolvency proceedings. They are not a salve to cure all corporate cross-border ills and simply having ‘liquidator’ in your title does not afford you their benefits.