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A Bad Attempt at Manufacturing COMI Ends in Denial of Chapter 15 Recognition
Maja Zerjal, Associate, Proskauer Rose LLP, New York, USAThe United States Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court') recently denied recognition of the foreign proceeding in a case where 'egregious bad faith' was at play. The foreign proceeding failed to satisfy the requirements for foreign main or nonmain proceeding because neither the debtors’ centre of main interest ('COMI') nor their establishment had shifted to the jurisdiction in which the liquidator was appointed where the liquidator’s activities in the two months before the chapter 15 filing had been minimal. In light of that, the Bankruptcy Court did not need to decide how the bad faith scheme behind the chapter 15 filing affected recognition, but is assured that courts have options to sanction a bad faith chapter 15 filing – even in circumstances where the requirements for recognition are satisfied.
Background
The chapter 15 debtors, Creative Finance Ltd. and Cosmorex Ltd. (the 'Debtors'), were foreign exchange trading companies organised under the laws of the British Virgin Islands (the 'BVI'). Most of their business was conducted through foreign exchange brokers located outside the BVI. The Debtors’ sole director resided in Spain, and the sole shareholder (the 'Shareholder') resided in either Spain or Dubai.
The Debtors were sued in an English court by Marex Financial Ltd. ('Marex') under certain contracts, which were governed by the laws of England and Wales and provided for jurisdiction in England. While the transactions that gave rise to the dispute were directed by the Shareholder from outside the BVI, the underlying contracts listed the BVI as the Debtors’ principal 'place of business office'. In July 2013, the judge presiding over the lawsuit circulated a draft judgment announcing a ruling in favour of Marex in the amount of over USD 5 million plus cost. The draft order prohibited parties from taking any actions that would frustrate the announced ruling before the formal judgment was issued. A week later, a formal judgment (the 'English Judgment') was issued, which established a deadline in August 2013 for the Debtors to satisfy the amounts due under the ruling. In that week between the circulation of the draft ruling and the issuance of the English Judgment, however, the Debtors transferred over USD 9.5 million from their account in England to accounts in Dubai and Gibraltar, in 'a blatant attempt to avoid payment'. With the money gone, the Debtors’ only remaining material assets were allowed unsecured claims of about USD 170 million in the chapter 11 case of Refco Capital Markets ('Refco'). On that account, the Debtors had already received distributions in excess of USD 1.7 million in August 2013, but that money had also disappeared by the time the insolvency proceedings in the BVI were commenced.
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