Offshore, But Not Off-Center

First, as a general observation, the court very sensibly had regard to the Model Law's goal of promoting a centralized proceeding and was keen to avoid a result which would “deny all recognition to a liquidation that has proceeded for years at an expense of millions of dollars, seemingly with the support of creditors.” Memorandum of Decision, page 6. In the court's words, this could “deny the Liquidators' access to any judicial relief in the U.S., or if they could not obtain nonmain recognition, compel them to start another proceeding in some putative third jurisdiction in the hope that a U.S. court, years in the future, might deem that place the COMI [Center of Main Interest] and grant an order of recognition.”

Second, the court placed weight on the absence of any proof of a better alternative COMI which, given that every entity presumably must have a center of main interest, indicated that the offshore proceedings ought to be recognized as foreign main proceedings. Although the court's legal analysis of the point in time to assess COMI may be regarded as contradicting Fairfield Sentry (In re Fairfield Sentry, 440 B.R. 60 (Bankr. SDNY, 2010)), its approach was similarly pragmatic. There is no indication that the court in Millennium would have decided the case of Fairfield Sentry any differently.

The Rulings

In Millennium, the court looked to the fact that there were directors located in Bermuda who were entitled to replace the funds' agents and to commence an insolvency proceeding, giving the Bermudian directors actual control over the funds. The court also took into account the fact that the fund's bank, custodian and auditors were also located in Bermuda. As a consequence, even though the “manager” was in Guernsey, the “investment manager” in London, and there was no evidence of investors or creditors residing in Bermuda, the court held that these factors pointed more toward the COMI being in Bermuda than anywhere else.

In Fairfield Sentry, the court found that although the debtor's assets and investors were international, the facts pointed to the BVI (British Virgin Islands) having been the most feasible administrative “nerve center” for some time and critically even before the commencement of the BVI proceedings during which time there was a “liquidation committee” making administrative decisions from the BVI. This determination was also partly as a result of the liquidators in BVI having taken steps to relocate the debtor's business activities to the BVI upon appointment, and in doing so causing other parties to look to BVI as the location of the business in the period following their appointment, but prior to the filing of the Chapter 15 petition. As in Millennium, the liquidation in BVI had been afoot for some time and the foreign representatives were actively administering the debtor's estate. The court found it appropriate to take into account the extended period prior to filing the Chapter 15 petition, during which the debtor's activities had been conducted only in connection with winding up (both formally and informally), but followed earlier authorities in using the date of filing the Chapter 15 petition as the time for determining COMI.

By placing weight on the absence of a better alternative COMI (either at the time of commencement of the foreign proceedings or as a consequence of them) and the effect of non-recognition on the administration of the debtor, both courts came to sensible decisions recognizing the offshore foreign proceedings as foreign main proceedings. The court in Fairfield Sentry was aware that a COMI at the time of the Chapter 15 petition may have shifted from what was the case when the funds were in business. In this respect it was, like the court in Millennium, concerned about the imperative that the COMI be “ascertainable by third parties.” However it made a “broader temporal assessment” when coming to the view that any shift was not “opportunistic” and noted that for some time even prior to the formal liquidation proceedings the administrative nerve center was the BVI.

The Principal Purpose of COMI

As the court in Millennium noted, the principal purpose of the COMI requirement is to provide a basis for centralizing insolvency proceedings relating to an enterprise in one forum. Memorandum of Decision, page 26. The use of this requirement assumes that a consistent analysis of the COMI of a particular enterprise by courts in different jurisdictions will prevent more than one proceeding that purports to be the main one. Whether courts will adhere to the requirement for consistent analysis will be crucial in the future to ensure continuity in cross border cases. Ideally, and in keeping with the spirit of the Model Law, comity would suggest that once a reasoned decision regarding COMI has been made by one court, absent any appeal, this should be the end of the matter. This does highlight the importance of a reasoned analysis of COMI by the courts asked to recognize a foreign proceeding, as occurred in both the Fairfield Sentry and Millennium cases.

Third, the court emphasized generally the need to ensure that offshore foreign representatives could have access to the U.S. judicial system so that legitimate claims could be pursued against third parties; it noted that otherwise, U.S. creditors that claim in offshore proceedings would be disadvantaged. Of course, such access is not restricted to those foreign representatives with foreign main recognition but is an important consideration when the court is deciding whether to grant any recognition at all.

Fourth, the court emphasized that the manner of applying the COMI test ought not to create a presumption against recognition of offshore foreign representatives. Given the very nature of international commercial structures involving offshore entities, it would be very easy to create such a presumption by focusing, for example, on the debtor not having creditors, investors, investment managers or brokers in the offshore jurisdiction. The approach in the Millennium decision does not seek to place undue weight on these matters.

Finally, the court reinforced the acceptance in the U.S. courts that an offshore jurisdiction (in this case, that of Bermuda, but equally Cayman) can have a sophisticated, fair and impartial legal system and ought to be granted comity. In doing so, the court accepted that when determining COMI the court should take into account the existence of such a legal system and a sophisticated body of law.

Steps by a Fund to Retain COMI

For offshore investors in funds looking to take advantage of the non-discretionary provisions of the Model Law, and to ensure that any liquidation does actually occur offshore, it is important that the fund in which they invest is aware of and seeks to ensure that the presumption of the place of incorporation as COMI is upheld. If Millennium's approach to the relevant date for assessing COMI is followed, liquidators may have less scope to argue that post appointment changes have shifted COMI and will need to rely instead on the facts as they exist upon commencement of the foreign insolvency proceedings.

Putting aside issues of deliberate COMI shifting prior to commencing insolvency proceedings, and drawing from the disussion in the Millennium case, there are steps which may be taken both at the time of inception of the fund and throughout its life to ensure that the COMI presumption is not rebutted. Such steps include:

• Ensuring that there are directors located in the offshore jurisdiction, and that these directors have the power to replace the fund's other agents and to put the fund into an insolvency proceeding;
• Having bank accounts in the offshore jurisdiction, and ensuring that investors are directed to send subscription payments to the offshore bank;
• Having auditors in the offshore jurisdictions (which may be required under local law or custom in any event);
• Ensuring that the management of the fund is in the offshore jurisdiction, even if the day-to-day management function is delegated to an investment manager onshore. Of course, actual management from the offshore jurisdiction would strengthen the argument;
• Where possible, having custodian services offshore (albeit practically this must be a result of an agreement between the onshore broker and the offshore cudtodian), or at the very least ensuring that the Offering Memorandum notes that the location and provider of the custodian services may vary;
• Ensuring that the Offering Memorandum for the fund makes it abundantly clear that the fund is an offshore entity to investors at the time their investment is made by appropriate language.
• To the extent that the Offering Memorandum refers to onshore management, ensuring it does not confuse this management with the identity of the fund as an offshore vehicle (for example, where management is “New York based”);
• Including language in the Offering Memorandum that any liquidation of the fund would take place under the offshore jurisdiction's laws;
• Where possible, identifying the fund as an offshore or specific foreign jurisdiction entity in the fund's name, particularly where the fund is affiliated with a large bank or other well known onshore financial institution.

In the case of both Bermuda and Cayman, at least some of the above kinds of presence in those jurisdictions may have been satisfied in any event because of custom or legislation governing the permission with which certain regulated companies such as funds or insurers carry on business in such jurisdictions. Quite apart from legal requirements, both Bermuda and Cayman also have an established commercial infrastructure and local specialist advisers, which means many such businesses will have chosen to have important aspects of their operations carried out in those jurisdictions in any event.

Conclusion

For investors and for those in particular dealing with the setting up of new funds, the latest message from the U.S. Bankruptcy Court is clear ' when it comes to determining COMI, the court is likely to focus on the locations of a fund's operations, and what is ascertainable to third parties, at the time of commencement of the foreign proceeding.

Foreign insolvency representatives may find they have to live with what the directors of the fund have put in place prior to their appointment and can do little in practice to influence the outcome of a Chapter 15 petition, although this will not preclude them from arguing that there is an establishment in the foreign jurisdiction (for foreign nonmain recognition) and seeking assistance.

However, with those warnings in mind, the decision in Millennium is welcome. Indeed, on the facts of the case, the court ultimately recognized the Bermuda proceedings as a foreign main proceeding. It unified the court's analysis with international jurisprudence but it also gave valuable assurance and guidance to those in reputable offshore jurisdictions. It now falls to those concerned with these issues to act on both.

Joanne Collett and Martin Ouwehand are members of the Litigation & Insolvency practice group of Appleby. Collett, who has practiced insolvency and bankruptcy law in both Australia and New York, is now resident in the Cayman Islands and represents clients primarily in relation to contentious and non-contentious insolvency matters. Ouwehand is resident in Bermuda and focuses on commercial litigation, particularly in matters involving urgent interim relief, corporate law, shareholder and partnership disputes, insolvency and commercial goods and services.

Last month, we discussed the fact that the recent insolvencies of offshore-based mutual funds have presented challenges for international comity when it comes to the complex issues of cross-border insolvency. One of the most important challenges is the degree to which the courts of one jurisdiction will recognize and assist the representatives of insolvency proceedings in another jurisdiction. This is particularly important in the context of offshore funds, which typically have investments, investment managers and investors located throughout the world, including the United States. We continue the discussion, which focuses on the recent case Millenium (Millennium Global Emerging Credit Master Fund Limited (SDNY 11-13171, Gropper J, 26 Aug. 2011)), herein.

Chapter 15

There are a number of aspects of the court's Millenium approach which provide more certainty that in appropriate cases offshore insolvency proceedings will be recognized as foreign main proceedings under Chapter 15.

First, as a general observation, the court very sensibly had regard to the Model Law's goal of promoting a centralized proceeding and was keen to avoid a result which would “deny all recognition to a liquidation that has proceeded for years at an expense of millions of dollars, seemingly with the support of creditors.” Memorandum of Decision, page 6. In the court's words, this could “deny the Liquidators' access to any judicial relief in the U.S., or if they could not obtain nonmain recognition, compel them to start another proceeding in some putative third jurisdiction in the hope that a U.S. court, years in the future, might deem that place the COMI [Center of Main Interest] and grant an order of recognition.”

Second, the court placed weight on the absence of any proof of a better alternative COMI which, given that every entity presumably must have a center of main interest, indicated that the offshore proceedings ought to be recognized as foreign main proceedings. Although the court's legal analysis of the point in time to assess COMI may be regarded as contradicting Fairfield Sentry (In re Fairfield Sentry, 440 B.R. 60 (Bankr. SDNY, 2010)), its approach was similarly pragmatic. There is no indication that the court in Millennium would have decided the case of Fairfield Sentry any differently.

The Rulings

In Millennium, the court looked to the fact that there were directors located in Bermuda who were entitled to replace the funds' agents and to commence an insolvency proceeding, giving the Bermudian directors actual control over the funds. The court also took into account the fact that the fund's bank, custodian and auditors were also located in Bermuda. As a consequence, even though the “manager” was in Guernsey, the “investment manager” in London, and there was no evidence of investors or creditors residing in Bermuda, the court held that these factors pointed more toward the COMI being in Bermuda than anywhere else.

In Fairfield Sentry, the court found that although the debtor's assets and investors were international, the facts pointed to the BVI (British Virgin Islands) having been the most feasible administrative “nerve center” for some time and critically even before the commencement of the BVI proceedings during which time there was a “liquidation committee” making administrative decisions from the BVI. This determination was also partly as a result of the liquidators in BVI having taken steps to relocate the debtor's business activities to the BVI upon appointment, and in doing so causing other parties to look to BVI as the location of the business in the period following their appointment, but prior to the filing of the Chapter 15 petition. As in Millennium, the liquidation in BVI had been afoot for some time and the foreign representatives were actively administering the debtor's estate. The court found it appropriate to take into account the extended period prior to filing the Chapter 15 petition, during which the debtor's activities had been conducted only in connection with winding up (both formally and informally), but followed earlier authorities in using the date of filing the Chapter 15 petition as the time for determining COMI.

By placing weight on the absence of a better alternative COMI (either at the time of commencement of the foreign proceedings or as a consequence of them) and the effect of non-recognition on the administration of the debtor, both courts came to sensible decisions recognizing the offshore foreign proceedings as foreign main proceedings. The court in Fairfield Sentry was aware that a COMI at the time of the Chapter 15 petition may have shifted from what was the case when the funds were in business. In this respect it was, like the court in Millennium, concerned about the imperative that the COMI be “ascertainable by third parties.” However it made a “broader temporal assessment” when coming to the view that any shift was not “opportunistic” and noted that for some time even prior to the formal liquidation proceedings the administrative nerve center was the BVI.

The Principal Purpose of COMI

As the court in Millennium noted, the principal purpose of the COMI requirement is to provide a basis for centralizing insolvency proceedings relating to an enterprise in one forum. Memorandum of Decision, page 26. The use of this requirement assumes that a consistent analysis of the COMI of a particular enterprise by courts in different jurisdictions will prevent more than one proceeding that purports to be the main one. Whether courts will adhere to the requirement for consistent analysis will be crucial in the future to ensure continuity in cross border cases. Ideally, and in keeping with the spirit of the Model Law, comity would suggest that once a reasoned decision regarding COMI has been made by one court, absent any appeal, this should be the end of the matter. This does highlight the importance of a reasoned analysis of COMI by the courts asked to recognize a foreign proceeding, as occurred in both the Fairfield Sentry and Millennium cases.

Third, the court emphasized generally the need to ensure that offshore foreign representatives could have access to the U.S. judicial system so that legitimate claims could be pursued against third parties; it noted that otherwise, U.S. creditors that claim in offshore proceedings would be disadvantaged. Of course, such access is not restricted to those foreign representatives with foreign main recognition but is an important consideration when the court is deciding whether to grant any recognition at all.

Fourth, the court emphasized that the manner of applying the COMI test ought not to create a presumption against recognition of offshore foreign representatives. Given the very nature of international commercial structures involving offshore entities, it would be very easy to create such a presumption by focusing, for example, on the debtor not having creditors, investors, investment managers or brokers in the offshore jurisdiction. The approach in the Millennium decision does not seek to place undue weight on these matters.

Finally, the court reinforced the acceptance in the U.S. courts that an offshore jurisdiction (in this case, that of Bermuda, but equally Cayman) can have a sophisticated, fair and impartial legal system and ought to be granted comity. In doing so, the court accepted that when determining COMI the court should take into account the existence of such a legal system and a sophisticated body of law.

Steps by a Fund to Retain COMI

For offshore investors in funds looking to take advantage of the non-discretionary provisions of the Model Law, and to ensure that any liquidation does actually occur offshore, it is important that the fund in which they invest is aware of and seeks to ensure that the presumption of the place of incorporation as COMI is upheld. If Millennium's approach to the relevant date for assessing COMI is followed, liquidators may have less scope to argue that post appointment changes have shifted COMI and will need to rely instead on the facts as they exist upon commencement of the foreign insolvency proceedings.

Putting aside issues of deliberate COMI shifting prior to commencing insolvency proceedings, and drawing from the disussion in the Millennium case, there are steps which may be taken both at the time of inception of the fund and throughout its life to ensure that the COMI presumption is not rebutted. Such steps include:

• Ensuring that there are directors located in the offshore jurisdiction, and that these directors have the power to replace the fund's other agents and to put the fund into an insolvency proceeding;
• Having bank accounts in the offshore jurisdiction, and ensuring that investors are directed to send subscription payments to the offshore bank;
• Having auditors in the offshore jurisdictions (which may be required under local law or custom in any event);
• Ensuring that the management of the fund is in the offshore jurisdiction, even if the day-to-day management function is delegated to an investment manager onshore. Of course, actual management from the offshore jurisdiction would strengthen the argument;
• Where possible, having custodian services offshore (albeit practically this must be a result of an agreement between the onshore broker and the offshore cudtodian), or at the very least ensuring that the Offering Memorandum notes that the location and provider of the custodian services may vary;
• Ensuring that the Offering Memorandum for the fund makes it abundantly clear that the fund is an offshore entity to investors at the time their investment is made by appropriate language.
• To the extent that the Offering Memorandum refers to onshore management, ensuring it does not confuse this management with the identity of the fund as an offshore vehicle (for example, where management is “New York based”);
• Including language in the Offering Memorandum that any liquidation of the fund would take place under the offshore jurisdiction's laws;
• Where possible, identifying the fund as an offshore or specific foreign jurisdiction entity in the fund's name, particularly where the fund is affiliated with a large bank or other well known onshore financial institution.

In the case of both Bermuda and Cayman, at least some of the above kinds of presence in those jurisdictions may have been satisfied in any event because of custom or legislation governing the permission with which certain regulated companies such as funds or insurers carry on business in such jurisdictions. Quite apart from legal requirements, both Bermuda and Cayman also have an established commercial infrastructure and local specialist advisers, which means many such businesses will have chosen to have important aspects of their operations carried out in those jurisdictions in any event.

Conclusion

For investors and for those in particular dealing with the setting up of new funds, the latest message from the U.S. Bankruptcy Court is clear ' when it comes to determining COMI, the court is likely to focus on the locations of a fund's operations, and what is ascertainable to third parties, at the time of commencement of the foreign proceeding.

Foreign insolvency representatives may find they have to live with what the directors of the fund have put in place prior to their appointment and can do little in practice to influence the outcome of a Chapter 15 petition, although this will not preclude them from arguing that there is an establishment in the foreign jurisdiction (for foreign nonmain recognition) and seeking assistance.

However, with those warnings in mind, the decision in Millennium is welcome. Indeed, on the facts of the case, the court ultimately recognized the Bermuda proceedings as a foreign main proceeding. It unified the court's analysis with international jurisprudence but it also gave valuable assurance and guidance to those in reputable offshore jurisdictions. It now falls to those concerned with these issues to act on both.

Joanne Collett and Martin Ouwehand are members of the Litigation & Insolvency practice group of Appleby. Collett, who has practiced insolvency and bankruptcy law in both Australia and New York, is now resident in the Cayman Islands and represents clients primarily in relation to contentious and non-contentious insolvency matters. Ouwehand is resident in Bermuda and focuses on commercial litigation, particularly in matters involving urgent interim relief, corporate law, shareholder and partnership disputes, insolvency and commercial goods and services.