Bear Stearns decisionStephen Gale 26 November 2007

Contents

• General observations

• Practical considerations arising

• (Comparative issues under EU Reg)

SPhinX Bear StearnsSept 06 Sept 07

(Robert D. Drain J (Burton R. Lifland J USBC-NYSD) USBC – NYSD)

Business hedge fund tracker “open ended investment companies”

R/O Cayman Islands Cayman Islands

Incorporation Cayman Islands Cayman Islands

Applicant Cayman liquidators Cayman provisional liquidators

Application (1) Foreign main proceeding (1) foreign main proceeding(2) additional relief (2) additional relief

(3) foreign non main

Trade - US - US/UK- none in Cayman - none in Cayman

Employees none none in Cayman

Offices none US

Assets - none in Cayman - all in US- “substantially all” in US - (assets moved into Cayman after filing)

Manager of fund - Delaware Corporation - Massachusetts corporation- located NYC - NYC manager

- registers Dublin Ireland

Directors - Irish, Bahamian, US 2 reside in Cayman- no meetings Cayman

Investors - worldwide - UK

Pre Chapter 15

1. Related bankruptcy case under Chapter 7 or Chapter 11

2. Limited bankruptcy proceedings ancillary to foreign case (304)

(e.g. injunctive relief stopping US law suits/creditor seizure US assets)

discretionary

to ensure “economical and expeditious administration” of estate, consistent with (inc) comity

Chapter 15

1. Foreign Main proceeding (comi)

automatic stay discretionary “additional assistance” foreign representative can operate business seek avoidance of unauthorised post-petition transfers

2. Foreign non-main (establishment)

discretionary stay

Note: subject to public policy exception

“if action manifestly contrary to the public policy of the US”

Comi (1502(4))

Not defined

Establishment (1502(5))

“ any place of operations where the debtor carries out a non-transitory economic activity”

The problems of SPhinX

• manifestly did not apply new law properly…..

• in attempting to achieve correct result (i.e. non recognition) – ignored provisions of Ch. 15

• especially in evidence to rebut COMI……

• and in giving sway to views of petitioner and other stakeholders without seeking objective test

• left law in a mess

• uncertainty & confusion

The advantages of Bear Stearns

• better application of new Ch. 15……

• nb. rebutable presumption re COMI

distinction: proof/evidence presumption included for “speed and convenience of

proof where there is no serious controversy” “permits and encourages fast action in cases where

speed essential”

• rejected proposition that no one argued to the contrary

• probably correct comi test

• but………..

• Re “establishment” (the non main alternative)

• “non-transitory economic activity” - (interpreted as local place of business)

• “here the bar is rather high, especially in view of the Cayman Islands’ statutory prohibition against “exempted companies” engaging in business in the Cayman Islands except in furtherance of their business otherwise carried on outside Cayman Islands”

• rejected “pragmatic” approach of SPhinX (“someone had to conduct the winding up”)

The Appeal

• “the legislative history of Ch. 15, international commentary, and the case law of this District all support a reading of Ch. 15 that is flexible and pragmatic, reflecting Congress’s intent to foster comity and cooperation between US and foreign courts. The Bankruptcy Court’s decision contradicts this reading. It should be reversed.”

The Appeal

• “Underguiding the Bankruptcy Court’s ruling was an inappropriate digression into substantive Cayman Island law and the Court’s erroneous view that companies registered as “exempted” under Cayman Island law can never have sufficient business in that country to satisfy Ch. 15’s recognition test”

• “….an examination of substantive Cayman Island law reveals that there is nothing……. that prevents an exempted company from having its COMI or maintaining on “establishment” in the Cayman Islands”

Evidence of, at least, “establishment”

• 2 of 4 debtors in Cayman Islands

• Both independent directors reside Cayman Islands and reviewed documents Cayman Islands

• Pre-filing attorneys Cayman Islands

• Pre-filing auditors Cayman Islands

• Liquid assets Cayman Islands

• Cayman Islands tax law

• Invested in CDO’s under Cayman Islands law

• Held out to be Cayman Islands companies

• Governed by laws of Cayman Islands

• Upon appointment of JPLs – exclusive Jn of Cayman Islands and board power ceased

Basis Yield Alpha Fund (Basis)

• Hearing date 15 January 2008 (but may be delay pending Bear Stearns appeal)

• USBC - SDNY

• Recognition under Ch. 15 as foreign main proceeding alternatively non main

• No objection filed by any creditors

• Cayman Islands “exempted company”

• S426 relief – recognition in E & W (September 07)

• NSW relief (October 2007)

• SPhinX and Bear Stearns cited

• “no controversy” re comi exists – unlike Bear Stearns

SPhinX Bear Stearns Basis YieldSept 06 Sept 07

(Robert D. Drain J (Burton R. Lifland J (Robert E Gerber J ) USBC-NYSD) USBC – NYSD) (January 08)

(USBC-NYSC)

Business hedge fund tracker “open ended master fundinvestment companies”

R/O Cayman Islands Cayman Islands Cayman Island

Applicant Cayman liquidators Cayman provisional liquidators Cayman provisional liquidators

Incorporation Cayman Islands Cayman Islands Cayman Islands

Application (1) Foreign main proceeding (1) foreign main proceeding (1) foreign main proceedings(2) additional relief (2) additional relief (2) foreign non main

(3) foreign non main (3) additional relief

Trade - US - US/UK - UK- none in Cayman - none in Cayman - US

- Australia

Employees none none in Cayman ?

Offices none US Cayman Islands (dormant)

Assets - none in Cayman - all in US dormant- “substantially all” in US - (assets moved into Cayman

after filing

Manager of - Delaware Corporation - Massachusetts corporation - feeder fund in Cayman IslandsFund - located NYC - NYC manager - administrators Cayman Islands

- registers Dublin Ireland - investment manager Cayman Islands

Directors - Irish, Bahamian, US 2 reside in Cayman dormant- no meetings Cayman

Investors - worldwide - UK - intention - US taxable investors

Conclusion

• Hopefully sanity, universality and jurisprudence will prevail either in Bear Stearns appeal or Basil

• If not……..!

• Good luck to Gabriel’s crusade but don’t hold your breath

• Ch. 11? Not really suitable in Funds

• Ch. 7 ? “hick practitioner off court rota”?!

Comparative table of Chapter 15 of US Bankruptcy Code and European Council Insolvency Regulation (No.1346/2000)

Please refer to attached

PTO/…..

CVStephen GalePartner, Corporate Recovery, London

Stephen is a solicitor and licensed Insolvency Practitioner. He has extensive experience of all aspects of insolvency and corporate recovery practice both in the UK and Asia. He is a past president of R3 (the UK restructuring, bankruptcy and turnaround professional body) and lectures widely on corporate recovery matters. He serves as an Honorary Senior Lecturer at the University College London’s department of law.

Stephen GaleTel: 020 7466 2878Email: stephen.gale@herbertsmith.com

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