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Cayman Islands Provisional Liquidations in Support of Chapter 11 Proceedings

17 December 2012

The wind down of Trident Microsystems (Far East) Ltd, a Cayman Islands company ("TMFE"), has been ongoing during the course of this year.  In January 2012, TMFE was placed into Chapter 11 proceedings in Delaware, pursuant to the United States Bankruptcy Code, together with its Delaware incorporated parent company.  In order to support the Chapter 11 proceedings and to ensure that creditors could not take steps to disrupt the process in the Cayman Islands, on the same day as the Chapter 11 petition was filed, Maples and Calder applied for the appointment of joint provisional liquidators in the Grand Court of the Cayman Islands (the "Court") on behalf of TMFE. 

The provisional liquidation process in the Cayman Islands is a flexible tool that can be used to assist in cross border liquidations and restructurings.  In this regard, section 104(3) of the Cayman Islands Companies Law (2012 Revision) allows a company to present a winding up petition and make an application to the Court to appoint provisional liquidators where: (a) the company is or is likely to become unable to pay its debts; and (b) the company intends to present a compromise or arrangement to its creditors.  A debtor that is proposing to enter into Chapter 11 proceedings, will generally meet these requirements and the Court has appointed provisional liquidators in support of Chapter 11 proceedings on a number of occasions1.

The main advantages of using a provisional liquidation in conjunction with Chapter 11 proceedings are:

(a) On appointment of provisional liquidators, no proceedings may be commenced or continued against the company without leave of the Court.  In circumstances where a company has creditors outside of the United States that are not subject to the jurisdiction of the automatic stay on litigation of the United States bankruptcy court, the Cayman Islands stay ensures that these creditors cannot commence litigation against the company in the Cayman Islands to try to obtain priority over the company's assets outside the Chapter 11 proceedings; and

(b) There are very few statutorily prescribed powers for provisional liquidators and instead their powers are set out in the court order appointing them.  This gives the Court flexibility to tailor the provisional liquidators' powers to suit the circumstances of the relevant cross border insolvency.  In particular, the Court rules2 expressly acknowledge that the appointment of provisional liquidators need not necessarily displace the powers of the directors.  The order appointing the provisional liquidators will set out which powers are to be retained by the company's directors and which powers can be exercised by the provisional liquidators.  This of course is essential for Chapter 11 proceedings where the directors of the company will normally continue to operate the company on a day to day basis as debtor in possession. 
 
In respect of TMFE the provisional liquidation progressed in parallel with the Chapter 11 proceedings to ensure that the assets of the company could be realised efficiently and restructuring options explored.  This case is a prime example of efficient judicial co-operation in a complex cross border matter.  Both the Court and the Delaware Court have been fully involved with all key decisions taken in the proceedings.  By way of example, four substantial asset sales took place during the provisional liquidation.  Completion of each of these asset sales was stated to be subject to the approval of both the Delaware Court and the Court.  It was agreed that as the asset sales had primarily been negotiated by the debtor, with the provisional liquidators in a supervisory role, the Delaware Court would be asked to approve the sale in the first instance.  Only if the Delaware Court made the order, would the Court be asked to approve the sale.  The Orders that were entered by the Delaware Court specifically provided that the asset sale was still subject to Court approval.  Likewise, to the extent that the Delaware Court placed any terms and conditions on its approval, the Court orders mirrored such terms and conditions. 

Two cross border protocols were put in place during the course of the provisional liquidation to ensure the efficient administration of the proceedings and delineate the roles and responsibilities of the provisional liquidators and the directors.  The Court and the Delaware Court approved these protocols by way of joint telephone hearings with attorneys in both the Cayman Islands and Delaware making submissions.  In this regard, the Court specifically endorsed judicial co-operation in cross border proceedings stating that, "This Court will continue to work in co-operation and co-ordination with courts in other jurisdictions when appropriate to ensure the fair and efficient management of international insolvency proceedings in the interests of all creditors and other interested persons, including the debtor."3 Ultimately a restructuring was not possible and instead, all of the assets of TMFE were realised with a view to having a plan of liquidation confirmed in the Chapter 11 proceedings.  Accordingly, it was no longer appropriate to continue the provisional liquidation and on 8 August 2012 the Court made orders placing TMFE into official liquidation.  Since that time, the official liquidators have continued to fulfil TMFE's obligations in the Chapter 11 proceedings and the Cayman proceedings.

In particular, as official liquidators have a statutory obligation to adjudicate on creditor claims4, on the appointment of the official liquidators, the Court and the Delaware Court were required to co-operate closely to implement a creditor claims procedure that does not offend against the rules of either jurisdiction.  A procedure has been proposed, which has been agreed by the official liquidators and stakeholders, whereby the creditor claims against TMFE will be adjudicated by the official liquidators (i.e. the official liquidators will determine whether claims should be allowed or disallowed) while the assets, which are located in the United States, will be distributed in accordance with the priorities set out in the Bankruptcy Code.In the event that a creditor's claim is disallowed by the official liquidators, the creditor has a right of appeal to the Court.  This procedure allows the official liquidators to fulfil their statutory obligation to adjudicate on claims, but also ensures that assets which are subject to the jurisdiction of the Delaware Court, are not distributed other than in accordance with Bankruptcy Code priorities. 

The case is still ongoing and a plan of liquidation has been proposed which will result in a 90% return to all of the unsecured, unaffiliated creditors of TMFE.  The plan will be considered by the Court and the Delaware Court at a further joint telephone hearing in December when the Delaware Court will be asked to confirm the plan under the Bankruptcy Code and the Court will be asked to give the official liquidators permission to compromise the creditor claims under the plan.6

1See for example, Re Fruit of the Loom [2000] CILR N-7; Trident Microsystems (Far East) Ltd, 11 January 2012, Grand Court unrep. Arcapita Investment Holdings Limited, 19 March 2012, Grand Court unrep.
2Order 4, rule 7(3), Companies Winding Up Rules (2008 Revision) (as amended)
3Trident Microsystems (Far East) Ltd, 12 April 2012, Grand Court unrep.
4Provisional liquidators have no such obligation and it is not normally the function of provisional liquidators to adjudicate on creditor claims.
5As the assets are subject to the jurisdiction of the Delaware Court, the official liquidators are not in a position to seek to impose Cayman Islands priorities.
6Official liquidators do not have the power to compromise creditor claims without the prior sanction of the Cayman Islands Court – section 110(2)(a) of the Companies Law (2012 Revision)


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