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Cross Border Restructuring and Insolvency Update - November 2014

Singularis Holdings Limited V PricewaterhouseCoopers (2014) [2014] UKPC 36

The Privy Council dismissed an appeal against the Court of Appeal of Bermuda''s refusal to order an auditor to release information it held on a company which had been wound up in another jurisdiction.

Singularis Holdings Limited ("Singularis") was incorporated in the Cayman Islands and had been wound up by the Grand Court of the Cayman Islands. PricewaterhouseCoopers ("PwC"), which was registered in Bermuda, were the former auditors of Singularis. The Cayman Islands-appointed liquidators of Singularis (the "Liquidators") sought an order from the Bermuda courts to obtain information held by PwC in its capacity as former auditors. The Liquidators were attempting to trace assets and they believed that PwC was likely to hold information which could assist them.

The Grand Court of the Cayman Islands had ordered PwC to provide information to the Liquidators. However, the power under which this order was made applied only to information that belonged to Singularis rather than information that belonged to PwC.

The law of Bermuda had a corresponding provision but was drafted in wider terms and was not limited to information only belonging to the company. However, the Bermuda provision could only apply to companies that had been wound up by the Bermuda courts. The Bermuda court proceeded to make an order exercising a common law power to order PwC to release the information to the Liquidators. The Court of Appeal of Bermuda subsequently set aside that order. It was this decision that was referred to the Privy Council by the Liquidators.

The questions to be considered by the Privy Council were a) whether the Bermuda court had a common law power to assist a foreign liquidation by ordering the production of information, and b) whether, if such a power existed, it was exercisable in circumstances where an equivalent order could not have been made by the court in which the foreign liquidation was proceeding.

The Privy Council considered that the principle of modified universalism was relevant; that is, the courts have a common law power to assist foreign liquidations. The principle is founded on the public interest and the ability of courts exercising insolvency jurisdiction to conduct an orderly winding up of a company''s affairs on a world-wide basis. However, the application of the principle must be consistent with the local substantive law and public policy.

The Privy Council placed great importance on the fact that the order which the Liquidators sought was not obtainable under the law of the Cayman Islands. The information that the Liquidators requested belonged to PwC and not to Singularis. Under Cayman Islands law, the Cayman Islands courts could not order the production of information by a third party. Accordingly, the Privy Council held that the Court of Appeal of Bermuda was correct in dismissing the appeal.

Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.)

The US Court of Appeals for the Second Circuit held that the sale of a SIPA claim was subject to a review under Section 363 Bankruptcy Code and that comity did not require deference to a foreign court''s approval.

Fairfield Sentry Limited, an investment fund based in the British Virgin Islands, had invested 95% of its assets with Bernard L Madoff Investment Securities LLC ("BLMIS"),  which went into Liquidation in late 2008 after perpetuating the biggest Ponzi scheme in US history.

In July 2009, Fairfield went into Liquidation in the BVI. The Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") granted Fairfield''s Liquidator''s request that the BVI Liquidation be recognised as a "foreign main proceeding" under Chapter 15 of the US Bankruptcy Code, imposing a stay on all proceedings against Fairfield in the US.

Fairfield''s assets included a Securities Investor Protection Act (SIPA) claim in the BLMIS Liquidation agreed at $230 million, which the Liquidator sold at auction in 2010 for 32.125%. The Liquidator and the purchaser signed a trade confirmation agreeing terms and conditions of the sale, including that the contract was governed by the laws of New York and that the transaction was subject to approvals by the BVI Court and the Bankruptcy Court. Days after the trade confirmation was signed the BLMIS Trustee reached a settlement of $7.2 billion increasing the value of the SIPA claim by approximately $40 million.

In 2012, the BVI Court approved the terms and conditions of the trade confirmation and the price agreed, but declined to rule on whether the Bankruptcy Court''s approval was required under Section 363 of the Bankruptcy Code, which requires a good business reason to approve a sale of the debtor''s assets outside the ordinary course of business.

The Liquidator filed an application for a Section 363 review, seeking an order disapproving the trade. The application was denied, described by the Bankruptcy Court as "seller''s remorse". The Court ruled that a Section 363 review was not warranted as the sale did not transfer interest in property within the jurisdiction of the US, and that they were required by comity to defer to the BVI judgment. The Liquidator appealed and the decision was upheld; he then appealed to the Second Circuit.

The Second Circuit overturned the decision, stating that the property in this case was the SIPA claim, not the funds of the BLMIS estate. The court ruled that the SIPA claim was within US jurisdiction under Section 1520 and ordered a Section 363 review. The court also rejected that the Bankruptcy Court should have deferred to the BVI Court as they had declined to rule on whether the trade confirmation required Section 363 approval and ordered that a review should be conducted.

The Second Circuit noted that the Bankruptcy Court is required to find a good business reason to approve the sale and should consider all relevant factors, including fluctuations in the value of the assets, and should exercise discretion to enhance the value of the estate, improving the return to creditors. It should also consider the increase in the value of the SIPA claim between signing the trade confirmation and it being approved by the Bankruptcy Court as the review is not limited to the date of signing.

This case demonstrates that Chapter 15 deference does not extend to transfers within the jurisdiction of the US and Bankruptcy Courts should not defer to approvals of sales by foreign courts on the basis of comity in relation to US assets. This may allow a debtor to reverse a foreign approved sale if there is an increase in the value of an asset. This decision is limited by the fact the trade confirmation was subject to approval by the New York Bankruptcy Court and that the BVI Court explicitly deferred to the Bankruptcy Court to approve the sale.

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