Matter of Axona Intern. Credit & Commerce Ltd.

• Decision Date: 11 August 1988
• Docket Number: Bankruptcy No. 83 B 10195.
• Parties: In the Matter of AXONA INTERNATIONAL CREDIT & COMMERCE LIMITED (formerly Bancom International Limited), Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

88 B.R. 597 (1988)

In the Matter of AXONA INTERNATIONAL CREDIT & COMMERCE LIMITED (formerly Bancom International Limited), Debtor.

Bankruptcy No. 83 B 10195.

United States Bankruptcy Court, S.D. New York.

July 8, 1988.

As Amended August 11, 1988.

Stroock & Stroock & Lavan, New York City (Daniel Golden and Melvin A. Brosterman, of counsel), for trustee.

Zalkin, Rodin & Goodman, New York City (Henry Goodman and Harold N. Schwinger, of counsel), for Chemical Bank.

Cleary, Gottlieb, Steen & Hamilton, New York City (Mark P. Friedman, of counsel), for Hong Kong Liquidators of Axona Intern. Credit & Commerce, Ltd.

Weil, Gotshal & Manges, New York City by Bruce R. Zirinsky, Irwin H. Warren, Richard B. Friedman, and Nicholas Gatto, for American Exp. Bank, Ltd., Mfrs. Hanover Trust Co. and State Street Bank Intern.

DECISION AND ORDER — ON APPLICATION TO SUSPEND THE CHAPTER 7 CASE AND DIRECT THE TURNOVER OF ASSETS, AND ON CROSS-APPLICATION TO DISMISS THE CASE AND VACATE AB INITIO ALL PROCEEDINGS AND SETTLEMENTS THEREIN

BURTON R. LIFLAND, Chief Judge.

I. INTRODUCTION

The chapter 7 case before this Court is the progeny of a Hong Kong winding-up proceeding concerning this debtor, Axona International Credit & Commerce Limited (hereafter "Axona" or "Debtor") pending in the Supreme Court of Hong Kong. The United States chapter 7 trustee and the Hong Kong liquidators (collectively the "Joint Applicants"),¹ creatures of the U.S. and H.K. Courts respectively, have moved by way of a joint application (the "Joint Application") on notice to all creditors, asking this Court to exercise its discretion and suspend the U.S. chapter 7 case in accordance with Section 305(b) of the Bankruptcy Code (the "Code") and direct the turnover of the assets of the chapter 7 estate to the Hong Kong liquidators for distribution in the primary Hong Kong winding-up proceeding.

Although a broad range of parties have appeared in the case, Chemical Bank ("Chemical") alone opposes this request² and has cross-moved for an order dismissing the chapter 7 case and vacating ab initio all proceedings instituted therein. The motions, augmented by affidavits and exhibits, have been submitted by both sides for determination by this Court. Chemical has based its opposition upon a potpourri of statutory, jurisdictional and constitutional arguments.³ While in the end, Chemical's strident objections can best be summed up as a grandiloquent exercise, they must be addressed, and in doing so this Court must navigate the relatively recently charted byways governing international bankruptcy as embodied in §§ 303, 304, and 305(b) of the Code. This mandates the application of the standards forged by Congress with a malleability intended to assist the Courts in administering the burgeoning number of multinational insolvency proceedings. In turn, this requires close attention to the facts at hand.

II. THE FACTS

A. Axona's financial collapse

Axona was a Hong Kong registered deposit taking company with its principal place of business in Hong Kong. It operated as a wholesale bank. While Axona did not engage in the banking business in the United States, it did have assets in this country in the form of substantial bank deposits.

Axona's financial collapse was precipitated by the November 15, 1982 collapse of Dollar Credit and Financing Ltd. ("Dollar Credit"), a larger, unrelated deposit taking company. Its collapse caused Axona's lines of credit to be immediately cut and the cessation of Axona's ability to operate.

B. The United States attachments

Axona's financial collapse triggered the immediate resort to United States Courts by three United States banks (collectively the "Attaching Creditors").⁴ Each obtained ex parte attachments of Axona's substantial United States bank accounts, which aggregated approximately $3.8 million.

C. The Chemical transaction

The Attaching Creditors were not alone in setting a course to reach Axona's assets before others to eliminate their exposure. Chemical also initiated a sequence of complex manoeuvres directed at self-help, which now serve as the cornerstone of Chemical's opposition to the Joint Application.

Chemical is organized under the laws of New York State with its principal office in New York City. Chemical had a banking relationship with Axona since 1975 and was its primary U.S. dollar clearing bank. Axona maintained a dollar demand deposit account at Chemical's New York main office ("Chemical N.Y.") and a Hong Kong dollar clearing account at its Hong Kong branch office ("Chemical H.K."). Chemical held personal guarantees from each of Axona's principal's in an amount up to US$4,000,000 each.

On November 15, 1982 Axona requested a US$3,000,000 loan for one month, from the Chemical branch office in Hong Kong (the "Time Loan"). The loan was approved that day. The US$3,000,000 proceeds were then disbursed to Axona's New York account on that day. This loan was an unsecured time loan, maturing in 30 days, and was to be repaid in New York by deposit of the funds to an account maintained by Chemical's Hong Kong branch at Chemical N.Y.

Unfortunately, November 15 was also the day Dollar Credit collapsed along with interbank support for deposit taking companies such as Axona. After learning of Dollar Credit's collapse that day, one of Axona's principal's contacted Chemical to relay that as a consequence of Dollar Credit's collapse, he did not believe Axona would be able to meet its ongoing obligations, including repayment of the Time Loan disbursed earlier that day.

Meetings were held the next day between Chemical and Axona's principals to address this problem. The result of these meetings was a complex plan devised by Chemical with the assistance of New York and Hong Kong counsel, and implemented by Axona's management, consisting of the immediate repayment of the Time Loan and the creation of a new fully collateralized demand loan. The only reasonable explanation for this swift and complex series of manoeuvres was that they served as the means for Chemical to secure its US$3,000,000 exposure.

The plan involved the November 16, 1982 issuance of a new demand loan collateralized by a US$3,000,000 "call account" opened at Chemical's Hong Kong branch with funds advanced by Chemical and deposited into a New York account on that same day.

Two days later, on Friday November 19, American Express served a writ of attachment of Axona's assets held by Chemical N.Y. In response, on the following Monday, November 22, Chemical H.K. "sold" the recently acquired demand loan to Chemical N.Y. In addition, the US$3,000,000 cash collateral account was transferred to Chemical N.Y. Chemical N.Y. then opened a new loan and Chemical H.K. was fully repaid. Chemical New York then "deemed itself insecure" with respect to the demand loan and offset its claim against Axona. Axona's indebtedness to Chemical was fully satisfied by this setoff.

D. The Hong Kong winding-up proceedings

On February 2, 1983, pursuant to Section 179 of the Hong Kong Companies Ordinance (Chapter 32 of the Laws of Hong Kong) (the "Companies Ordinance") a creditor of Axona filed a petition with the Supreme Court of Hong Kong (the "Hong Kong Court") for the compulsory winding-up of Axona. A cardinal principle governing proceedings under the Companies Ordinance, which is derived directly from the English Companies Act, is equality of distribution. See Section 250 of the Companies Ordinance. See generally, December 2, 1986 Affidavit of Nicholas John Bennett (the "Bennett Aff."), a member of Wilkinson & Grist, Solicitors, Hong Kong.

On February 4, 1983, the Hong Kong Court appointed Michael J. Johnson and Eoghan M. McMillan, partners in the Hong Kong office of Arthur Andersen & Company, as joint provisional liquidators (the "Liquidators"). The Liquidators are officers of the Hong Kong Court and are responsible to that Court which can, for cause, remove them from office. Section 196(1) of the Companies Ordinance. The Liquidators' activities are monitored by the Hong Kong Court and any party in interest may apply to the Court to review the Liquidators activities and if necessary, the Court may make an appropriate order. Section 200(5) of the Companies Ordinance. The Hong Kong Court has ultimate control of the Liquidators remuneration. Section 196(2) of the Companies Ordinance. In addition, the Official Receiver, a government official not unlike the United States Trustee under the Code, (28 U.S.C. § 586), has a supervisory role in a winding-up proceeding, including the obligation to audit the Liquidators' accounts twice a year. See Sections 195(b), 202, 203 and 204 of the Companies Ordinance.

On March 4, 1983, the Hong Kong Court ordered Axona wound-up under the Companies Ordinance and continued Messrs. Johnson and McMillan as permanent liquidators. The Liquidators have duly qualified as such under the Companies Ordinance.

E. The Commencement of the Involuntary Case

Immediately upon their provisional appointment, the Liquidators learned of the attachments made by the Attaching Creditors in the United States. The Liquidators also suspected that Axona may have been the victim of a substantial fraud committed by U.S. entities.

In light of this information, and as is set forth in the opinion from the Hong Kong High Court⁵ the Liquidators sought advice from their U.S. counsel, Cleary, Gottlieb, Steen & Hamilton ("Cleary"), as to the alternatives available to them under the U.S. Bankruptcy Code to secure the preservation and protection of Axona's U.S. property. In a February 7, 1983 memorandum (the "Cleary Memo," exhibit 1 to Chemical's appendix to its cross-application for relief), Cleary considered the options available to the Liquidators — commencement of an involuntary case under § 303(b)(4) of the Code or an ancillary proceeding under § 304. The Cleary Memo opined that because it was doubtful that a foreign liquidator in a § 304 ancillary proceeding could utilize a trustee's...