Location of Bank Account Matters, says U.S. Judge September 2010
When structuring an offshore hedge fund, or indeed any offshore structure, sponsors and promoters are generally extremely diligent and detailed in selecting the location of the country of incorporation and service providers who act as the registered office, directors, auditors, administrators and legal counsel to the structure. Other seemingly less important aspects of the structure do not receive the same amount of consideration with one of those items being the location of the bank account, whether for receipt of subscriptions and payment of redemption monies or simply a general bank account. However, the recent ruling by Judge Lifland in the United States Bankruptcy Court for the Southern District of New York in the case of re Fairfield Sentry Ltd. may well make sponsors and lawyers think twice about the location of an entity’s bank account.
In 2005, Congress enacted chapter 15 of the Bankruptcy Code, making relief available to administrators of non-US insolvency proceedings following recognition by a US Bankruptcy Court. Early decisions called into question whether chapter 15 relief was available to administrators of insolvent non-US hedge funds where such funds had significant assets or investments in the US. These decisions, including the Bear Stearns decision, held that where a non-US hedge fund’s primary assets were located in the US and its management was located in the US, such fund’s ‘centre of main interests’ (COMI) was located in the US and the fund could never be recognized as a ‘foreign main proceeding’. The only relief available would be to commence a proceeding under chapter 11 of the Bankruptcy Code, which would greatly increase the administrative expense of these cross-border proceedings.
In July 2010, the Bankruptcy Court for the Southern District of New York in re Fairfield Sentry Ltd issued a ruling that carves back the apparently stringent boundaries established in Bear Stearns. In Fairfield, Judge Lifland determined that the proper time to determine the COMI of a non-US hedge fund debtor is the time that the debtor files a chapter 15 petition. In Fairfield, Judge Lifland granted chapter 15 recognition as a ‘foreign main proceeding’ to insolvency cases pending in the British Virgin Islands in respect of a group of insolvent hedge funds. Judge Lifland found that the debtors’ COMI at the time of the petition was the BVI because the debtors’ activities were centralized in the BVI throughout the pending liquidation and the debtors’ assets consisted primarily of cash in a BVI bank account, notwithstanding the fact that while the funds were solvent, their assets and management were located in the US. The Fairfield opinion signals an interesting and important divergence from the previous ruling in the Southern District of New York. Whilst this may be a somewhat specialized situation of a company becoming insolvent and seeking to establish that its COMI were in the BVI, it is entirely possible that a company may wish to determine that its COMI is offshore for other valid reasons, such as taxation, licensing or confidentiality.
Why doesn’t every offshore entity establish an offshore bank account at the time of its incorporation as a matter of course? In the past, a bureaucratic accounting opening process and poor levels of service were a deterrent. Now, thanks to technology, cutting-edge offshore banks are competing directly with mainstream onshore banks and perhaps surpassing them as specialist, niche providers in this field.
Offshore banks, such as Cayman Institutional Bank, offer practical offshore banking solutions that leading institutions can rely on, including competitive fees, simple account opening, 24/7 online access and late cut-off times. If something as simple as establishing and maintaining an offshore bank account can be an important, sometimes deciding, factor in determining a company’s centre of main interest, then perhaps the dividend that the offshore bank account pays could be one of the best investments that the an offshore company or hedge fund ever makes.