Issues Faced in Insolvencies Issues Faced in Insolvencies Moderator: J Ross McDonough 17 Jan 2014

Liquidation Funding General trends since 2008 What we don't have in Cayman: ⁻DIP financing (at least of the type available in the US and absent parallel Ch. 11 proceedings) ⁻Contingency (i.e. no win-no fee) fee arrangements for lawyers (at least for proceedings pursued in Cayman) ⁻The ability to bring recovery actions without the risk of adverse costs orders

Liquidation Funding What we do have in Cayman: Restructuring provisional liquidations: ⁻DIP financing can be provided where there are parallel Ch. 11 proceedings and with a Cayman validation order (eg Arcapita) ⁻Absent parallel Ch. 11 proceedings working capital can still be provided on a secured basis with a Cayman validation order, but the market and process is much less developed

Liquidation Funding Official liquidations: ⁻Sale of the company’s litigation claims, often in consideration for the estate receiving a percentage of any recoveries made by the purchaser ⁻General liquidation or specific litigation funding, typically on terms where the lender receives principal, interest and a percentage of any recoveries made by the estate (but beware of champerty) ⁻Liquidators being remunerated based on a percentage of realisations and/or distributions ⁻Contingency fee arrangements where the litigation is to be brought in the US (eg SPhinX; AJW) ⁻Conditional fee arrangements where the litigation is to be brought in Cayman (eg DD Growth Premium 2X Fund)

Overview  Indemnification commonly given to: Auditors, Advisors, Directors, Administrators, Brokers Dynamics introduced to a liquidation  Ranking, Quantification, Timing, Litigation Principles of reserving for indemnities  “ Just Estimate” – §139  High Degree of Assurance - (SPhinX)

Practicalities in estimating a reserve  Legal Costs, Damages  Rogue Claims, Contribution Resolving indemnities  Insurance, Distribution Plans, Settlements Other considerations  CFA arrangements  Jurisdictional Differences

© 2013 Grant Thornton Specialist Services (Cayman) Limited. All rights reserved. Information gathering by liquidators Liquidators' powers under Cayman law limited to: –"relevant persons" (definition) – deliver up company's property & documents, examination and interrogatories Enforcement against non resident parties? Cross border options – using foreign law – statutory provisions/ regulatory – discovery – ancillary insolvency proceedings – common law The Saad "Bermuda" cases –background –respective outcomes (pending appeal to Privy Council) and rationale – ancillary proceedings, common law relief

Chapter 15: COMI and Recognition The “Black Box” and the “Eclipse of Comity”. The Fairfield Sentry “workaround” Bear Stearns relies on first gaining “traction” over time in the foreign main proceeding. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007), aff’d 389 B.R. 325 (2008); In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010), aff’d 2013 WL (2d Cir. Apr. 16, 2013). Fairfield Sentry no panacea: No time to gain traction in some instances. Fairfield Sentry still at risk / may not be followed more widely. UNCITRAL ‘s new revision to Guide to Enactment to the Model Law is that COMI fixed as of date foreign main proceeding filed. 8 SATTERLEE STEPHENS BURKE & BURKE LLP NEW YORK

CHAPTER 15: The (Continued) Eclipse of Comity Recognition being interpreted as a question of authority. Where recognition lacking / impossible / pending, foreign representatives can be denied all assistance in the US. Reserve Int’l Liquidity Fund v. Caxton, 2010 WL (S.D.N.Y. Apr. 29, 2010). More cross-border chaos and competing fiduciaries: “Blocking” plenary cases filed in the United States. Fletcher is one such case as are its “cousin” Soundview cases. Automatic Stay held to stymie offshore office-holders. 9 SATTERLEE STEPHENS BURKE & BURKE LLP NEW YORK

Chapter 15 Drawbridge / Barnet Drawbridge problem arises outside the Model Law context. Second Circuit held chapter 11 “debtor” requirements = chapter 15 “debtor” requirements Chapter 15 “debtor” must have a domicile or property in the US. Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 2013 WL (2d Cir. Dec. 11, 2013). US domestic bankruptcy law undermines Chapter 15: Some entities could not possibly meet section 109(a). Some JOLs only wish to conduct discovery in the US. Could mean rise in “orphaned” non-recognized foreign proceedings. Problematic as New York a favored venue for Chapter 15 practice Drawbridge mandatory precedent for New York’s bankruptcy court. Second Circuit also influential beyond its borders. Rationale: 28 U.S.C. 1728(a) discovery in aid of foreign proceedings remains available for office holders. 10 SATTERLEE STEPHENS BURKE & BURKE LLP NEW YORK

Thank You Questions?