Chapter 15 Recognition: Fairfield Sentry Limited (in Liquidation)

As well as issuing claims in mistake and restitution in the BVI Commercial Court and the US State Supreme Court, the liquidators of Fairfield Sentry Limited (“the Fund”) also petitioned for and, on 22 July 2010 obtained, Chapter 15 recognition in the United States Bankruptcy Court for the Southern District of New York. This is an interesting development and, as we understand the position from US Counsel, it means that the liquidators should now be able to seek Chapter 7 or Chapter 11 recognition with a view to bringing claw back claims against redeemed investors in the New York Bankruptcy Court pursuant to the Bankruptcy Code (“the Code”). As at the date of this article, the liquidators have yet to seek Chapter 7 or Chapter 11 recognition and no bankruptcy claims have yet been issued.

The purpose of Chapter 15 of the Code is to realise (a) co-operation between the US and foreign Courts and representatives; (b) greater legal certainty for trade and investments; (c) fair and efficient administration of estates; (d) protection and maximization of assets; and (e) facilitation of the rescue of financially troubled businesses. Chapter 15 essentially encompasses the Model Law on Cross-Border Insolvency, which was previously adopted by the United Nations Commission on International Trade Law (UNCITRAL). As an aside, although Part XVIII of the BVI Insolvency Act 2003 dealing with cross-border insolvency also seeks to enact the UNCITRAL Model Law on Cross-Border Insolvency, it has not, as yet, been brought into force. We understand from the Official Receiver, however, that the Financial Services Commission is presently in the process of reconsidering whether to enact these provisions in the near future.

A copy of the Minutes of the Proceedings of the liquidators’ Chapter 15 recognition Petition can been obtained

The following points arising out of the Minutes of the Proceedings are of note:

• The liquidators of the Fund sought recognition of the BVI liquidation proceedings as foreign main proceedings under section 1517(b)(1) of the Code or, in the alternative, as foreign nonmain proceedings under section 1517(b)(2) of the Code.
• The Petition was objected to by two investors who were plaintiffs in a putative derivative action that was being brought on the Fund’s behalf in the New York State Supreme Court. The main point of contention between the parties was whether the Fund’s centre of main interest (“COMI”) should be determined as of the date of the Petition (in which case the liquidation would be deemed to represent ongoing business activities) or, as the objectors argued, COMI should be determined with reference to the period leading up to the filing of the Petition (in which case the Court should focus only on the Fund’s business activities prior to the commencement of the liquidation). Ultimately the Court found that the contentions of both parties were misplaced given that a review of the relevant factors placed the COMI in the BVI for the pre-liquidation and post-liquidation periods.
• The US Court found, as a preliminary matter, that based on the relevant evidence, the BVI liquidation proceedings are foreign main proceedings under section 101(23) of the Code as they are “collective judicial or administrative proceeding[s] in a foreign country…under a law relating to insolvency…in which…the assets and affairs of the debtor are subject to control or supervision by a foreign Court for the purposes of…liquidation.” The Court was persuaded that the Fund’s COMI was BVI for the following reasons:

1. The Court recognised, pursuant to section 1516(c) of the Code, the importance of the Fund’s place of registration in determining COMI by creating a rebuttable presumption that “[i]n the absence of evidence to the contrary, the [Fund’s] registered office…is presumed to be [its COMI]”.
2. The Court was satisfied on all of the relevant evidence that the Fund effectively stopped doing business more than 18 months before the liquidators’ Petition and 7 months before the BVI liquidation proceedings commenced.
3. As a result of the fact that the Fund’s investment managers resigned shortly after the Madoff fraud was discovered in December 2008 and the Fund’s contracts with the investment manager were severed in 2009, long before the petition was filed, the Court found that the Fund had no place of business, no management and no tangible assets located in the United States.
4. It found that the Fund’s activities had, for an extended period, been conducted only in connection with the winding up of its affairs. The Court said that it was appropriate to consider this extended period in determining COMI.
5. The Court was happy that the Fund’s COMI was the BVI despite the fact that Fund’s assets and investors are international.
6. The Court was mindful that since the liquidation had commenced, an independent litigation committee had governed the Fund’s affairs and that the committee had been comprised of non-United States-based directors, and most of its decision-making originated in the BVI.
7. It took account of the fact that since the commencement of the BVI liquidation proceedings, the BVI-based liquidators had been directing and coordinating the Fund’s affairs and that the Fund’s main liquid assets were held in a BVI account.
8. It was mindful of the fact that United States citizens held less than 10% of the equity in the Fund and comprised only 17% of all of the Fund’s shareholders.
9. The Court found it significant that the liquidators had BVI-resident employees and offices and had undertaken to transfer significant books and records to office space leased by the Fund in the BVI.

• Although those objecting to the petition sought to argue that the Fund had substantial intangible assets in New York in the form of contingent and disputed litigation claims, the Court did not take account of these. It concluded that these unliquidated, contingent and disputed claims should be given no greater weight for COMI purposes than any of the Fund’s other substantial claims relating to assets that are pending in Ireland and the BVI.
• The Court was also persuaded that “the record as to the relevant period beginning December 2008, which straddles the Liquidators’ appointment dates, does not support a finding of an opportunistic shift of the [Fund’s] COMI or any biased activity or motivation to distort factors to establish a COMI in the BVI.” The Court was happy that during this key period, the Fund’s “administrative nerve centre existed in the BVI.”

Based on these reasons and bearing in mind that “non-recognition where recognition is due may forestall needed inter-nation cooperation,” the Court was prepared to recognise the BVI liquidation proceedings as foreign main proceedings, subject to a further review under sections 1517(d) and 1522(c) of the Code should other contrary factors come to light to indicate that a different holding is warranted. On this basis it was prepared to stay the objector’s purported derivative action, as well as all actions concerning the Fund’s rights and assets. It did, however, recognise and implement a stipulation that the liquidators had entered into with the BLMIS trustee’s adversary proceedings against the Fund, in respect of which the Court recognised that the parties continued to engaged in good faith efforts to facilitate settlement.

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