Why would a debtor with no assets in the United States seek cooperation from a U.S. bankruptcy court in cross-border insolvency proceedings?
At a recent hearing before the Grand Court, the Cayman Islands liquidators of BCCI Overseas applied for and received their discharge and the Court ordered the formal dissolution of all of the BCCI group companies in the Cayman Islands. This judicial procedure brought to an end an assignment that had run for nearly 22 years.
The international reach of U.S. bankruptcy law might well be regarded as imperialistic. As to any debtor who satisfies the broad eligibility qualifications, a U.S. bankruptcy proceeding encompasses all rights in property of the debtor, “wherever located and by whomever held."
Asked how buyers can avoid known but latent risks in investments in financial products, law and business students often respond by suggesting contractual hedges of one sort or another. But they often overlook the meta-risk of insolvency.
It is an abuse of process for a party to use an application to court based on an unpaid debt to attempt to liquidate or bankrupt a debtor in order to try to compel payment of a debt which is genuinely disputed.
Investments in mortgage-backed debts carry reduced risk in light of the special protections afforded to collateralized claims. Second-lien investing, however, is subject to enhanced risk due to the greater likelihood of collateral value insufficiency.
Critics characterize activist fund investors as raiders and destroyers of value for the sake of selfish arbitrage. New research1 paints a much more nuanced portrait of hedge fund participation in Chapter 11 reorganization cases.
Since debt enjoys priority of payment in insolvency proceedings, demoting a debt claim to the lower rank of an equity interest likely means a total loss for the distressed investor.
Reorganisation plans frequently include releases of non-debtor third parties, but this is one area where informed hedge fund creditors have significant power to resist the destruction of an important alternate source of recovery.