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Issues Faced in Insolvencies

Issues Faced in Insolvencies. Moderator: J Ross McDonough. 17 Jan 2014. Issues Faced in Insolvencies . Liquidation Funding. General trends since 2008 What we don't have in Cayman: DIP financing (at least of the type available in the US and absent parallel Ch. 11 proceedings)

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Issues Faced in Insolvencies

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  1. Issues Faced in Insolvencies Moderator: J Ross McDonough 17 Jan 2014 Issues Faced in Insolvencies

  2. Liquidation Funding • General trends since 2008 • What we don't have in Cayman: • DIP financing (at least of the type available in the US and absent parallel Ch. 11 proceedings) • Contingency (i.e. no win-no fee) fee arrangements for lawyers (at least for proceedings pursued in Cayman) • The ability to bring recovery actions without the risk of adverse costs orders

  3. Liquidation Funding • What we do have in Cayman: • Restructuring provisional liquidations: • DIP financing can be provided where there are parallel Ch. 11 proceedings and with a Cayman validation order (eg Arcapita) • Absent parallel Ch. 11 proceedings working capital can still be provided on a secured basis with a Cayman validation order, but the market and process is much less developed

  4. Liquidation Funding • Official liquidations: • Sale of the company’s litigation claims, often in consideration for the estate receiving a percentage of any recoveries made by the purchaser • General liquidation or specific litigation funding, typically on terms where the lender receives principal, interest and a percentage of any recoveries made by the estate (but beware of champerty) • Liquidators being remunerated based on a percentage of realisations and/or distributions • Contingency fee arrangements where the litigation is to be brought in the US (eg SPhinX; AJW) • Conditional fee arrangements where the litigation is to be brought in Cayman (eg DD Growth Premium 2X Fund)

  5. Indemnities & Fund Liquidations • Overview • Indemnification commonly given to: Auditors, Advisors, Directors, Administrators, Brokers • Dynamics introduced to a liquidation • Ranking, Quantification, Timing, Litigation • Principles of reserving for indemnities • “Just Estimate” – §139 • High Degree of Assurance - (SPhinX)

  6. Indemnities & Fund Liquidations • Practicalities in estimating a reserve • Legal Costs, Damages • Rogue Claims, Contribution • Resolving indemnities • Insurance, Distribution Plans, Settlements • Other considerations • CFA arrangements • Jurisdictional Differences

  7. Information gathering by liquidators • Liquidators' powers under Cayman law limited to: • "relevant persons" (definition) – deliver up company's property & documents, examination and interrogatories • Enforcement against non resident parties? • Cross border options – using foreign law • statutory provisions/ regulatory • discovery • ancillary insolvency proceedings • common law • The Saad "Bermuda" cases • background • respective outcomes (pending appeal to Privy Council) and rationale – ancillary proceedings, common law relief

  8. Chapter 15:COMI and Recognition • The “Black Box” and the “Eclipse of Comity”. • The Fairfield Sentry“workaround” Bear Stearnsrelies on first gaining “traction” over time in the foreign main proceeding.In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007), aff’d 389 B.R. 325 (2008); In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010), aff’d 2013 WL 1593348 (2d Cir. Apr. 16, 2013). • Fairfield Sentryno panacea: • No time to gain traction in some instances. • Fairfield Sentrystill at risk / may not be followed more widely. • UNCITRAL ‘s new revision to Guide to Enactment to the Model Law is that COMI fixed as of date foreign main proceeding filed. SATTERLEE STEPHENS BURKE & BURKE LLP • NEW YORK

  9. CHAPTER 15:The (Continued) Eclipse of Comity • Recognition being interpreted as a question of authority. • Where recognition lacking / impossible / pending, foreign representatives can be denied all assistance in the US. Reserve Int’l Liquidity Fund v. Caxton, 2010 WL 1779282 (S.D.N.Y. Apr. 29, 2010). • More cross-border chaos and competing fiduciaries: • “Blocking” plenary cases filed in the United States. • Fletcher is one such case as are its “cousin” Soundviewcases. • Automatic Stay held to stymie offshore office-holders. SATTERLEE STEPHENS BURKE & BURKE LLP • NEW YORK

  10. Chapter 15Drawbridge / Barnet • Drawbridgeproblem arises outside the Model Law context. • Second Circuit held chapter 11 “debtor” requirements = chapter 15 “debtor” requirements • Chapter 15 “debtor” must have a domicile or property in the US. Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 2013 WL 6482499 (2d Cir. Dec. 11, 2013). • US domestic bankruptcy law undermines Chapter 15: • Some entities could not possibly meet section 109(a). • Some JOLs only wish to conduct discovery in the US. • Could mean rise in “orphaned” non-recognized foreign proceedings. • Problematic as New York a favored venue for Chapter 15 practice • Drawbridge mandatory precedent for New York’s bankruptcy court. • Second Circuit also influential beyond its borders. • Rationale: 28 U.S.C. 1728(a) discovery in aid of foreign proceedings remains available for office holders. SATTERLEE STEPHENS BURKE & BURKE LLP • NEW YORK

  11. Thank You Questions?

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