Restructuring

Contributed by Yvanna Custodio
In the first part of our two-part series on In re Suntech, we discussed the bankruptcy court’s ruling that Suntech was eligible to be a debtor under the Bankruptcy Code and that venue was proper in the Southern District of New York because of a bank account established in New York on the eve of the chapter 15 filing. We noted the implications of the decision for bankruptcy professionals handling cross-border cases, and that, among other things, the court’s interpretation of section 109(a) of the Bankruptcy Code (which sets forth the standard for a debtor’s eligibility) offers a more “open border” policy for foreign companies wishing to commence a chapter 15 case, and arguably a chapter 11 case, in the United States. In today’s post, we discuss the bankruptcy court’s center of main interests (COMI) analysis in addressing Solyndra’s argument that the foreign administrators had manipulated COMI to the Cayman Islands in bad faith.
Section 1502(4) of the Bankruptcy Code introduces COMI as the basis for classifying a foreign proceeding as a “foreign main proceeding,” which would entitle such proceeding to chapter 15 recognition, and provide the foreign debtor with certain rights unavailable to a foreign debtor whose foreign proceeding is merely a “foreign nonmain proceeding.” Unless there is evidence to the contrary, a debtor’s registered office is presumed to be its COMI.
After noting that “[t]he answer is not obvious in a case like this,” the bankruptcy court held that the commencement of the Cayman Islands provisional liquidation and the activities of the foreign administrators successfully transferred the debtor’s COMI from China, where the debtor had historically listed its principal executive offices, to the Cayman Islands. It observed that, although the order appointing the foreign administrators left management of the debtor’s business to the board of directors, in practice, the board exercised “little day-to-day authority.” Notably, the order authorized the foreign administrators to develop and propose a compromise or arrangement with the debtor’s creditors, file a chapter 15 petition in the United States, and exercise “a host of additional powers,” including exercise control over the debtor’s operating subsidiaries. Moreover, prior to the filing of the chapter 15 petition, the foreign administrators took appropriate steps to centralize the administration of the debtor’s affairs in the Cayman Islands. The court also rejected the notion that the creditors expected a restructuring in China, given that they had described it as “the last place that one would want to go.”
Assuming that the Cayman Islands was the debtor’s COMI when the chapter 15 case was filed, Solyndra argued that the foreign administrators manipulated the COMI in bad faith, pointing to, among other things, the transfer of stock certificates, shareholder registries, and statutory records to the Cayman Islands. The court declined to find bad faith, however, noting that the actions of the foreign administrators in making such transfers, as well as conducting a board meeting in the Cayman Islands and establishing a Cayman Islands bank account, were all consistent with the duties of the foreign administrators.
A Spotlight on COMI
The Suntech court’s holding on COMI highlights the ability of foreign administrators to shift a debtor’s COMI from one jurisdiction to another, provided such shift is in furtherance of the debtor’s restructuring and is consistent with the order appointing the foreign administrators. Given that chapter 15 provides recognition to a foreign main proceeding (which could impact the treatment of a foreign debtor’s U.S. assets), the Suntech decision could be relied upon by some as a case study in how to shift COMI from a jurisdiction that is perceived to be less debtor-friendly to one that is perceived to be more so.