When Is a Cayman Islands Liquidation Not a Foreign Proceeding Under Chapter 15 Bankruptcy?
The court ruled that investigating $600 million in alleged corporate fraud does not constitute a bankruptcy proceeding, even with appointed liquidators. This decision sent shockwaves through the offshore restructuring industry. U.S. bankruptcy courts have drawn a sharp line between genuine insolvency procedures and corporate disputes masquerading as liquidations.
In 2022, the Southern District of New York rejected recognition of a Cayman "liquidation" involving Global Cord Blood Corporation, establishing precedent that now shapes cross-border proceedings. The distinction matters because Chapter 15 bankruptcy recognition grants foreign representatives powerful tools: automatic stays, discovery rights, asset turnover orders, and the ability to enforce foreign court judgments in the United States.
Chapter 15 Recognition Overview
| Criteria | Recognizable Proceeding | Non-Recognizable Proceeding |
|---|---|---|
| Purpose | Liquidation/reorganization of debts | Investigation of director fraud |
| Nature | Collective for all creditors | Protection of corporate assets |
| Debtor Status | Insolvent/insolvency risk | Solvent company |
| Claims Process | Active filing and adjudication | Absent or suspended |
| Legal Basis | Companies Act (liquidation) | Section 92(e) ("just and equitable") |
What is Chapter 15 Bankruptcy
Chapter 15 of the Bankruptcy Code represents specialized machinery enabling international cooperation in cross-border insolvency cases. The legislation took effect in 2005, replacing Section 304. Congress modeled it on UNCITRAL's 1997 Model Law.
Five statutory objectives guide the framework: promoting cooperation between U.S. courts and foreign authorities, establishing legal certainty, ensuring fair administration, maximizing asset values, and facilitating business rescue. The bankruptcy framework distinguishes between recognition and full relief.
Business Bankruptcy Chapter 15
Chapter 15 bankruptcy for businesses functions as a bridge between American jurisdiction and foreign insolvency proceedings. A foreign representative files a petition for recognition in a U.S. court, attaching evidence proving the proceeding's existence. In 2024, courts received 65 new Chapter 15 cases connected to proceedings in 12 jurisdictions: Canada (25), Cayman Islands (8), British Virgin Islands (9), Brazil (5), and others.
The process begins with characterizing the foreign proceeding as a "foreign main proceeding" or "foreign nonmain proceeding." Main proceedings require the debtor's center of main interests (COMI) in the proceeding's country. Recognition triggers the automatic stay under Section 362 of the Bankruptcy Code.
Foreign Bankruptcy
International bankruptcy law rests on comity - mutual respect between sovereign nations. The Model Law on Cross-Border Insolvency serves as the foundation for Chapter 15.
Seven elements determine whether a proceeding qualifies as a "foreign proceeding" under bankruptcy law: collective nature; judicial or administrative procedure; conducted in a foreign country; assets under court control; authorized under insolvency law; purpose of reorganization or liquidation; and including interim proceedings.
The Global Cord Blood bankruptcy case demonstrated the importance of satisfying all elements. Joint provisional liquidators (JPLs) were appointed to investigate suspected improper expenditure of over $600 million. Judge Jones analyzed each element. The JPLs conceded the Cayman proceeding did not seek to identify creditors, quantify claims, or determine asset distribution.
Recognition of Foreign Bankruptcy in the U.S.
Recognition of foreign bankruptcy in the United States requires satisfying Section 1517 of the Bankruptcy Code. Mandatory recognition applies if three conditions are met: the proceeding meets the proceeding definition, a foreign representative files the petition, and sufficient evidence accompanies the filing.
Section 1515 specifies documentation requirements. Petitions must include evidence proving the foreign proceeding's existence and the representative's appointment. A presumption favors recognition when documents are properly assembled.
After recognition, courts may grant various relief forms under Section 1521. Discretionary relief includes evidence discovery, witness examination, asset turnover to foreign representatives, and transaction approval. Section 1507 permits "additional assistance" provided it comports with comity principles in bankruptcy law.
The SVB Cayman case from 2024 established clear Chapter 15 eligibility boundaries for financial institutions. After Silicon Valley Bank's collapse, the FDIC was appointed receiver. SVB Cayman liquidators filed a petition seeking recognition. The FDIC objected, arguing SVB Cayman was not a separate entity. The Southern District of New York court sided with the FDIC. Foreign bank liquidations cannot be recognized under Chapter 15 provisions.
International Bankruptcy
International bankruptcy proceedings demand coordination across multiple jurisdictions. Chapter 15 specifically encourages cooperation under Sections 1525-1527. Courts must "cooperate to the maximum extent possible" with foreign courts and representatives.
Modern Land China Co., Ltd.'s 2022 bankruptcy case illustrated COMI determination complexity. The company was incorporated in the Cayman Islands, with shares on the Hong Kong Stock Exchange, conducting real estate development in China and the United States. After 2021 defaults, Modern Land initiated a Cayman scheme of arrangement.
The U.S. Bankruptcy Court examined multiple factors: judicial role, activities in the Cayman Islands, absence of objections, and good faith filing. The deciding factor was Cayman court supervision over the restructuring scheme. Recognition was granted. The scheme discharged New York law-governed debt, demonstrating Chapter 15 recognition's substantive effect.
Canadian bankruptcy proceedings form a significant portion - 25 of 65 Chapter 15 cases in 2024. Canada's Companies' Creditors Arrangement Act provides for monitor appointment to oversee restructuring. Monitors frequently serve as foreign representatives in Chapter 15 proceedings.
US Bankruptcy Court
American courts apply a two-level comity test when considering Chapter 15 petitions. Adjudicatory comity refers to abstaining from jurisdiction favoring pending foreign proceedings or enforcing foreign tribunal judgments. Prescriptive comity concerns respecting other countries' laws by limiting domestic law reach.
The Third Circuit in the 2024 Wayne Burt case emphasized that Chapter 15 embodies American policy favoring deference to foreign proceedings. The Singaporean liquidator petitioned the Court for New Jersey for recognition. The court granted recognition, resulting in litigation stay.
Section 1506 of the Bankruptcy Code establishes a public policy exception to Chapter 15-authorized relief. Nothing prevents courts from refusing action if the action would be "manifestly contrary" to United States public policy. This safeguard rarely applies. Courts interpret "manifestly contrary" narrowly, requiring egregious violations.
The 2024 decisions collectively reinforce that Chapter 15 serves as ancillary relief supporting genuine insolvency proceedings, not standalone remedies. Courts scrutinize whether proceedings involve creditor-focused collective action addressing insolvency.
Frequently Asked Questions
Can Chapter 15 bankruptcy be used for Cayman companies created solely for holding purposes?
Yes, if the company conducts genuine debt reorganization or liquidation through collective bankruptcy proceedings rather than just corporate governance or investigation activities.
Is having U.S. creditors required to file a Chapter 15 petition in American bankruptcy court?
No, absence of U.S. creditors does not prevent recognition, as demonstrated in the ECM Straits bankruptcy case where debtors had no known American creditors.
Can a foreign bank obtain Chapter 15 recognition for its bankruptcy proceeding in the United States?
No, Sections 109(b) and 1501 of the Bankruptcy Code exclude foreign banks from Chapter 15 eligibility, as established in the SVB Cayman decision.
Does automatic bankruptcy stay apply automatically after recognition of a foreign main proceeding in a Chapter 15 case?
Yes, Section 1520(a) of the Bankruptcy Code provides automatic application of the automatic stay under Section 362 upon foreign main proceeding recognition.
Must a new Chapter 15 bankruptcy petition be filed if the foreign proceeding converts from restructuring to liquidation?
No, existing recognition continues when converting from reorganization to liquidation, and new bankruptcy filing is not required according to 2023 precedents.
Updated 2026-01-11