U.S. Court Decision Clarifies Recognition Of Cayman Liquidations

Introduction

Since the decision of Judge Drain of the U.S. Bankruptcy Court for the Southern District of New York in the case of In re SPhinX Ltd., et al, Chapter 15, Case No. 06-11760 ("SPhinX") in mid-2006, there has been justifiable cause for concern amongst Cayman Islands-based insolvency practitioners with respect to the recognition of Cayman liquidations in the U.S.†

The SPhinX decision cast doubt on whether the U.S. Courts were likely to recognise Cayman proceedings following changes to the U.S. Bankruptcy Code.††Those concerns have now been ameliorated, at least in part, by the decision of†Judge†Drain in the case of†Amerindo Internet Growth Fund Ltd (In Liquidation) ("Amerindo") on 5 March 2007.

In SPhinX, Judge†Drain had refused to grant recognition of a Cayman Islands Official Liquidation as a "foreign main proceeding" within the meaning of Chapter 15 of the U.S. Bankruptcy Code ("Chapter 15").† In SPhinX, the Court deviated from the objective standards set out in Chapter 15 for determination of whether a foreign proceeding ought to be recognised as "main" or "non-main".† Instead, the Court looked to subjective matters such as the purpose for which the application was made, and declined to grant recognition on the basis that the underlying purpose of the application had been improper (such matters were relevant under the previous section 304 regime, but do not apply to applications under the new section 1502 regime).†

Impact in Cayman

The SPhinX†decision was troubling to Cayman Islands-based insolvency practitioners, as an application for recognition by the U.S. Courts of a Cayman liquidation is often a crucial step in conducting the liquidation (as the subject companies and funds so often have significant cross-border connections to the U.S.).† Of course, the main practical effect of successfully obtaining an order that a Cayman liquidation is recognised as a foreign main proceeding is that the liquidators are then availed of the right to an automatic stay with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the U.S.

In Amerindo, Judge†Drain did not consider it necessary to publish written reasons but was content to recognise...