Baha Mar judgment posts positive note for offshore investors

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In the past decade, the US courts and offshore courts have co-operated in cross-border restructurings of multinational companies, often with significant connections to China. In some cases, this is because the true operations are located in the PRC in the form of significant factories, or because PRC investors have bought equity or debt in an offshore company.

iStock_19760626_XLARGEUsually, the offshore jurisdictions involve companies incorporated in Cayman Islands or Bermuda. For example, the Cayman Islands and Bermuda courts have been accustomed to appointing provisional liquidators over Cayman or Bermuda companies to evoke a stay of proceedings locally, as a means of co-operating with chapter 11 proceedings. The recent decision by the US Bankruptcy Court in Re Northshore Mainland Services Inc et al (Baha Mar) shows sensible judicial restraint in favour of offshore courts.

To qualify under chapter 11 (the debtor-in-possession restructuring tool), a debtor merely needs to have property in the US, such as having a bank account or paying a retainer to lawyers there. Technically, there is no requirement for insolvency to qualify under chapter 11, and a number of other reasons have been accepted to qualify, e.g. the risk of considerable damages being awarded against the company or anticipated liquidity issues. Despite the wide ambit of Chapter 11, the recent decision in Baha Mar demonstrates that the US Bankruptcy Court will be pragmatic in deciding whether it has jurisdiction over a company under chapter 11.

Baha Mar concerned a group of companies of which all but one were incorporated under the laws of the Bahamas. Only one of the group’s companies was incorporated under the laws of Delaware. The group’s main asset was a 3.3 million-square-foot development on Cable Beach in the Bahamas, a tourist resort complex which would have contributed an additional 12% to the GDP of the Bahamas upon its completion.

At its heart, the Baha Mar case is a dispute between Swiss-born businessman Sarkis Izmirlian, the brains behind the mammoth complex, and the world’s third-largest construction company, China State Construction Engineering Corporation (CSCEC), which brought in 5,000 migrant Chinese labourers to build the resort. Despite this, the initial completion date was missed, and extended dates up to 27 March 2015 were also missed.

As a result, and despite being 97% complete, without any guests to generate revenue the directors, led by Izmirlian, applied to the US Bankruptcy Courts for chapter 11 relief and applied to the Bahamas Supreme Court for recognition of that chapter 11 relief.

Chapter 11 recognition was opposed by creditors and the Bahamas attorney-general, and rejected by the Bahamas Supreme Court. Upon application by the Bahamas attorney-general, provisional liquidators were finally appointed over Baha Mar by the Bahamas Supreme Court. US Bankruptcy Judge Kevin Carey was tasked with deciding whether jurisdiction over Baha Mar should be wrestled from the Bahamas Court.

On the one hand is the wide ambit of chapter 11 and its seemingly infinite ability to exercise jurisdiction over companies with very little connection to the US. On the other was a company founded, operating in, and where stakeholders would consider to be located in, the Bahamas. In this landmark decision, Judge Carey considered that: “In business transactions, particularly now in today’s global economy, the parties, as one goal, seek certainty. Expectations of various factors – including the expectations surrounding the question of where ultimately disputes will be resolved – are important, should be respected, and not disrupted unless a greater good is to be accomplished. Under these circumstances, I can perceive no greater good to be accomplished by exercising jurisdiction over these chapter 11 cases …”

The expectations of stakeholders was held to be paramount in considering the proper forum for the insolvency proceedings and, despite the wide ambit of chapter 11, Judge Carey adopted a pragmatic approach in considering that the stakeholders of Baha Mar, in particular its creditors, would expect that its insolvency proceedings would be in the Bahamas, rather than in the US.

For this reason, the directors’ application to place Baha Mar in chapter 11 was rejected. Every case will be different but the best interests of creditors will ultimately determine whether the US or offshore courts are the appropriate forum for insolvency proceedings. Importantly, Baha Mar recognises that the US Bankruptcy Courts will defer cases to the jurisdiction of offshore courts where it is in creditors’ best interests.

IAN MANN is head of Harneys’ Offshore Litigation and Restructuring Department in Hong Kong, servicing Asia-based clients involved in offshore litigation