OAS Group, one of Brazil’s largest engineering and construction groups, has operations throughout South and Central America. It is one of the main players implicated as a result of Operação Lavo Jato, which revealed widespread corruption among senior business professionals in Brazil and led to the arrest of well over 100 individuals.
Parts of the OAS Group (including some foreign subsidiaries and affiliates) have applied for protection under Brazilian Recuperação Judicial (RJ) proceedings, following an unsuccessful attempt to effect a restructuring out of court. The reorganisation attempts provoked concerns amongst OAS’s creditors.
OAS had used two BVI companies as financing vehicles to raise approximately USD$2 billion by issuing notes under New York law. This is a far from unusual model for inward investment into Brazil: it is fairly commonplace for financing for Brazilian businesses from US and other overseas investors, to be sourced through BVI or Cayman companies.
Two creditors, who had invested through the BVI vehicles, applied in the BVI court for the appointment of provisional liquidators over the two OAS-owned BVI vehicles. Subsequently, competing applications were brought in court in New York for recognition of foreign insolvency office holders.
The resulting duel fought in the courts of New York, Brazil, and the BVI engages a fascinating debate as to how conflicting appointments interact and will be treated under the auspices of the UNCITRAL model law on cross-border insolvency.
Determination of the scope of the residual powers of directors of a company in provisional liquidation is likely to be central to the outcome of the Chapter 15 applications; however, in the present case this is a question of BVI law and not of New York law.
If the BVI court were to determine that the residual powers of directors go beyond the mere right to challenge the appointment of a provisional liquidator and the making of a winding up order, this decision has the potential to introduce the type of ‘light touch’ provisional liquidations that are commonly used in jurisdictions such as Bermuda and the Cayman Islands in support of foreign insolvency proceedings; however, these ‘light-touch’ provisional liquidations are typically company led, rather than being driven without the support of petitioning creditors.
If the directors of the BVI companies retained substantial residual powers, it is arguable that their COMIs are still Brazil and were not displaced on the appointment of the provisional liquidators. Conversely, if the directors’ residual powers were limited, it is likely to mean that the provisional liquidators’ application for Chapter 15 should succeed, and not the application by the representatives in the Brazil proceedings. This question strips the COMI debate to its very core and asks whether or not a creditor may, by seeking to engage an insolvency process in a company’s own jurisdiction, be deemed as having manipulated rules on COMI and recognition for its own ends.
The OAS case provides a good example of how BVI and Cayman issues can potentially assist creditors, or potentially hamper a company, when Recuperação Judicial is sought.