Baha Mar judgment posts positive note for offshore investors

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.

Usually, 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.

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