CHAPTER 3, F. Offshore Courts and the Emerging Role of COMI in Recognition

• Jurisdiction: United States

F. Offshore Courts and the Emerging Role of COMI in Recognition

ABI Journal

February 2019

Mark A. Russell

KSG Attorneys

Grand Cayman, Cayman Islands

In recent years, offshore financial centers have been at the forefront of the development of the courts' common law powers to recognize and assist foreign insolvency proceedings. As these are jurisdictions that generally have limited (or no) statutory recognition regimes, it is not surprising that common law power continues to play an important role.

One of the more interesting questions concerns the basis upon which foreign officeholders are entitled to recognition. The longstanding traditional view was that only a foreign proceeding in the jurisdiction of the company's incorporation could be recognized. This approach is now being challenged, and a familiar term is being used to justify an alternative basis for recognition: center of main interests (COMI). Explicitly borrowed from the UNCITRAL Model Law, the COMI concept has the potential to revolutionize common law recognition by moving beyond the 19th century approach and allowing courts to respond flexibly, pragmatically and commercially to the issues raised in modern cross-border proceedings. This article discusses two recent Cayman Islands cases that exemplify this trend — In re China Agrotech¹ and In re Changgang Dunxin² — and places them in context as the latest judicial proclamations on COMI's emerging role in common law recognition.

In re China Agrotech: Nontraditional Recognition

China Agrotech was a Cayman-incorporated company traded on the Hong Kong Stock Exchange (SEHK). It encountered financial distress, and the SEHK suspended share trading. A creditor presented a winding-up petition against the company to the Hong Kong court, which made a winding-up order and appointed liquidators. The liquidators devised a restructuring proposal that required implementation through parallel schemes of arrangement in Hong Kong and the Cayman Islands. They asked the Hong Kong court to issue a letter to the Cayman court requesting permission for the Hong Kong liquidators to promote a Cayman scheme of arrangement in the name of China Agrotech, then made an application to the Cayman court on that basis.

The Hong Kong liquidators asked the Cayman court to recognize them as having authority to act for the company in Cayman. The statutory regime for recognition of foreign insolvency proceedings was not applicable because the liquidators were appointed outside the company's jurisdiction of incorporation. The request therefore raised two important issues. First, did the Cayman court have the power at common law to recognize and assist a foreign liquidator appointed in a jurisdiction other than where the company was incorporated? Second, if the power did exist, should it be exercised in these circumstances? The court answered both questions affirmatively.

On the first issue, the court began by considering the nature of the common law power to recognize and assist foreign insolvency courts and officeholders by reference to the Privy Council's seminal decision in Singularis Holdings Ltd. v. PricewaterhouseCoopers.³ In Singularis, a case on appeal from Bermuda, the Privy Council affirmed the existence, and sketched out the purposes and limitations around the exercise, of the power. In particular, the board stressed that the power can only be exercised to overcome the territorial limits of the foreign court's jurisdiction and consistently with the domestic procedural and substantive law of the court granting the assistance. The former limitation restricts assistance to relief that the foreign liquidator could have obtained in its home jurisdiction. The latter limitation precludes the assisting court from extending a purely domestic insolvency statutory remedy as if the statute applied to the foreign proceeding.

The China Agrotech court then considered the nature of the common law power in light of the request by the Hong Kong liquidators to promote a Cayman scheme of arrangement. Under the Companies Law, the company itself has the right to make an application to the court to convene a meeting of creditors or shareholders to whom a scheme is proposed.⁴...