The decision by the US Bankruptcy Court in Re Northshore Mainland Services, Inc et al (Case No 15-11402-KJC) (Baha Mar) shows sensible judicial restraint in favour of offshore courts (where appropriate).

§109(b) of Chapter 11 of the US Bankruptcy Code (Chapter 11) is drafted in the following terms:

Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.

To qualify under Chapter 11 it would appear that a debtor merely needs to have property in the US such as having a bank account or paying a retainer to lawyers in the US. Technically, there is no requirement for insolvency to qualify under Chapter 11 and a number of other reasons have been accepted to qualify under Chapter 11 – eg the risk of considerable damages being awarded against the company or anticipated liquidity issues.

Despite the wide ambit of Chapter 11, the recent decision of Baha Mar demonstrates that the US Bankruptcy Court will be pragmatic in deciding whether it has jurisdiction over a company under Chapter 11.

Baha Mar concerned a group of companies (the Group) of which all but one were incorporated under the laws of the Bahamas. Only one group company was incorporated under the laws of Delaware. The Group's main asset was a 3.3 million square foot development on Cable Beach in the Bahamas, a tourist resort complex which would have contributed an additional 12 per cent to the GDP of the Bahamas at its completion.

At its heart the Baha Mar case is a dispute between Swiss-born businessman Sarkis Izmirlian, the brains behind the mammoth complex and the world's third-largest construction company, China State Construction Engineering Corporation (CSCEC). CSCEC brought in 5,000 migrant Chinese labourers to the Bahamas to build the resort. Despite this, the initial completion date was missed, extended dates up to 27 March 2015 were also missed. As a result and despite being 97 per cent complete, without any guests to generate revenue, the directors, led by Sarkis Izmirlian, applied to the US Bankruptcy Courts for Chapter 11 relief and applied to the Bahamas Supreme Court for recognition of that Chapter 11 relief.

Chapter 11 recognition was opposed by creditors and the Bahamas Attorney General and finally rejected by the Bahamas Supreme Court. Upon application by the Bahamas Attorney General, provisional liquidators were finally appointed over Baha Mar by the Bahamas Supreme Court. So the world looked to one single judge in the US Bankruptcy Court in Delaware to decide the fate of the company. US Bankruptcy Judge Kevin J. Carey was charged with deciding whether jurisdiction over Baha Mar would be wrestled from the Bahamas Court. Just under the surface, this was a David and Goliath fight to protect the sovereign right of the Bahamas to deal with a company that was very much located in the Bahamas.

On one hand is the wide ambit of Chapter 11 and its seemingly infinite ability to exercise jurisdiction over companies with very little connection to the US; on the other was a company founded, operating in and where stakeholders would consider to be located in the Bahamas. In this landmark decision Judge Carey considered that:

"In business transactions, particularly now in today's global economy, the parties, as one goal, seek certainty. Expectations of various factors - - including the expectations surrounding the question of where ultimately disputes will be resolved - - are important, should be respected, and not disrupted unless a greater good is to be accomplished. Under these circumstances, I can perceive no greater good to be accomplished by exercising jurisdiction over these chapter 11 cases..."

The expectations of stakeholders was held to be paramount in considering the proper forum for the insolvency proceedings and, despite the wide ambit of Chapter 11, Judge Carey adopted a pragmatic approach in considering that the stakeholders of Baha Mar, in particular its creditors, would expect that its insolvency proceedings would be in the Bahamas rather than in the US. For this reason, the directors' application to place Baha Mar in Chapter 11 was rejected.

This case has interesting parallels with the situation where the offshore courts, in particular the Cayman Courts, cooperate with US Courts. For example, the Cayman Courts have been accustomed to appointing provisional liquidators over Cayman companies to evoke a stay of proceedings in the Cayman Islands as a means of cooperating with Chapter 11 proceedings.

Every case will be different but the best interests of creditors will ultimately determine whether the US or offshore courts are the appropriate forum for insolvency proceedings. Importantly, Baha Mar recognises that the US Bankruptcy Courts will defer cases to the jurisdiction of offshore courts where it is in creditors' best interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.