U.S. court denies Cayman funds bankruptcy protection
 |
- U.S. judge denies Cayman-registered funds bankruptcy protection under chapter 15
- Offshore status may not protect Cayman funds from U.S. litigation
|
A U.S. bankruptcy judge last month ruled that two Bear Stearns hedge funds, incorporated in the Cayman Islands, could not be granted bankruptcy protection, known as Chapter 15. A recently introduced rule, Chapter 15 of the U.S. Bankruptcy Code requires the U.S. courts to cooperate with foreign jurisdictions in cross-border insolvencies. Without protection under Chapter 15, the funds remain liable to lawsuits from U.S. creditors.
The two funds—Bear Stearns’ High Grade Structured Credit Strategies Master Fund and High Grade Structured Credit Strategies Enhanced Leveraged Master Fund—collapsed following the recent subprime mortgage crisis and were wound up on 30 July. On 31 July, the Grand Cayman Court appointed provisional liquidators to the funds.
However, giving judgment, Judge Burton Lifland, said that filing for bankruptcy in the Cayman Islands did not make Bear Stearns eligible for protection under Chapter 15, as “the only adhesive connection with the Cayman Islands is the fact that they are registered there. ” In particular, he noted that the funds were managed in New York and had no employees or managers based in the Cayman Islands. Its back-office operations were also based in the United States as were all its liquid assets.
Although two of the three investors in the High Grade fund were based in Cayman, the judge noted that both of these were Bear Stearns entities “with the same minimum Cayman Islands profile as the funds. ” The sole investor in the Leveraged Fund is a U.K. entity.
Previously, some investors expressed concern that Chapter 15 would limit their ability to pursue claims against failed offshore funds. However, this ruling suggests that funds incorporated offshore but with assets and operations in the United States may not be able to seek protection from lawsuits during bankruptcy.
Bear Stearns may now seek protection under Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code, or it may appeal the decision. Bear Stearns’ motivation for filing for bankruptcy in Cayman, as opposed to the United States, is uncertain although some experts have speculated it would be preferred as Cayman court proceedings may be less transparent and less costly.
To read the full judgment, click here: Bear Stearns – Order Denying Recognition of Foreign Proceeding.
ABOUT YOUR PUBLISHER, FSI:
FSI is a well known law firm with specialist expertise in relation to enquiries and investigations instigated by the FSA and overseas regulators, including AMF in France and the SEC in the US. Often working in conjunction with compliance specialists and other professional advisers, the team will attend interviews at the FSA, advise on all correspondence with the FSA and represent their clients before the Regulatory Decisions Committee and the Financial Services Markets Tribunal. For further information on how we might be able to help you, please contact head of team, Philip Rubens:
Philip Rubens is head of the financial services team at FSI. Having undertaken a secondment at the FSA, Philip is a leading expert in the regulatory enforcement field.