The Tribune

The Baha Mar bankruptcy order should be granted in the Bahamas to avoid a damaging dog-fight between creditors, Richard Coulson urges.

If Prime Minister Perry Christie was indeed “blind-sided” by Baha Mar‘s abrupt Court Order for protection under Chapter 11 of the United States bankruptcy code last week, it can only be because he was keeping his head in the sand.

Weeks of fruitless negotiations between the hotel complex and the Chinese lending bank and its associated construction company had not led to any result despite Mr Christie’s repeated statements of “optimism”. Baha Mar was receiving exactly zero income and meanwhile was paying over 2,000 staff and facing bills for normal operating expenses like electricity, water, cleaning and maintenance.

Clearly the money crunch was fast approaching.

Fortunately, the Baha Mar group of companies includes one incorporated in Delaware, giving US courts jurisdiction, and fortunately the American legal system has an effective way of handling business enterprises that are running out of cash but still possess real value.

Chapter 11 was enacted by Congress in the midst of the 1930s depression, when hundreds of struggling companies were put into bankruptcy and prompt liquidation by the first unpaid creditor to file.

Chapter 11 radically changed the rules of the game. A company facing a host of claims it cannot immediately pay makes a formal petition to the Federal Bankruptcy Court, which issues an Order requiring the company, known as the “debtor in possession”, to put itself under the jurisdiction of the court to analyse its assets and liabilities and review and approve a plan of reorganisation submitted by the debtor and all its creditors.

The court grants a “stay” preventing any claimant from taking legal action for payment while the plan is under court review.

Since its enactment in 1934, thousands of US companies have sought protection under Chapter 11. Not all of them could be saved; ether their assets or business prospects were too weak and they had to be liquidated. But many major business such as General Motors, Delta Airlines, Texaco and Winn Dixie Stores were given breathing space to reorganise their affairs, make full or partial debt payments and emerge from bankruptcy as profitable operations.

The Chapter 11 system has been accepted by creditors because it does not ignore their rights; they are invited to state their claims before a judge or bankruptcy trustees who make a rational decision. Not every claimant gets 100 percent of what they ask but the final decision must be accepted by all.

That is why Sarkis Izmirlian’s decision to use Chapter 11 was not generated by “contempt for the Bahamas” as claimed by several local politicians. Simply, the Bahamian legal system has nothing similar to Chapter 11. There was real possibility that The Export-Import Bank of China could declare its billion dollar loan in default and move for our Supreme Court to declare Baha Mar insolvent, followed by appointment of liquidators who would promptly remove the directors, close the business and start handing over the assets to the creditors - the archaic process that we inherited from the laws of Olde England and never up-dated.

The Chinese Bank, as the largest secured lender, could have ended up as the Baha Mar owner. Even granting China the best will in the world, do we want a state-controlled foreign company controlling a huge chunk of our realty?

By contrast, the Chapter 11 US Court Order “stayed” the Bank (or any other creditor) from acting and required that Mr Izmirlian provide up to $80 million to cover salaries and operating expenses through the reorganisation period.

Thus, when this Order was presented to Supreme Court Justice Ian Winder for recognition and enforcement in the Bahamas, I was astonished that Attorney General Allyson Maynard opposed the motion, forcing Justice Winder to defer the hearing from last Thursday to tomorrow, almost the last day for Bahamas Court approval.

Although a highly-trained and experienced lawyer, she was acting more as a politician than a legal professional. She raised no substantive objections to the Order but claimed it would endanger our “sovereignty” to have legal issues resolved in the US.

“Sovereignty” is always an emotive word to arouse the populace, but makes no sense here, because the Bahamian court would work in full co-operation with the US court. She also was alarmed that the 2,400 Bahamian workers would become a “pawn” under the Order, and rushed forth an offer of one month’s pay, about $7.5 million (funded how?).

This was a pointless grandstand play, since the $80 million committed by the debtor in possession not only covers the one-month salary but also initiates the reorganisation plan to assure long-tem employment.

The Chinese bank joined the Attorney General in opposing Bahamian approval of the Chapter 11 order. This seems a short-sighted position since the Bank will have full opportunity to assert its claims in court under the Chapter 11 procedures.

We do hope the Attorney General finds a graceful way to reconsider and withdraw her objection to the Chapter 11 Order and that Justice Winder sees the urgency to give it immediate Bahamian effect. Of course, this is only the beginning of the reorganisation process, which will require Mr Izmirlian to find major sources of new investment capital.

He may bring the Chinese back to the table, or he may already be talking to Wall Street financiers or hotel/casino groups from Las Vegas or Macao who see the appeal of buying into a handsome 98 per cent completed resort. But such negotiations can only be concluded if the Chapter 11 Order remains in place, assuring orderly court-supervised procedures and maintaining the “stay” against premature claims.

The steps under Chapter 11 are well known in the US and can easily be imported here under supervision of a Bahamian court. If, unwisely, the Chapter 11 proceedings are blocked, the $80 million funding will be lost, and I foresee a prolonged dog-fight among creditors that will not help to open Baha Mar’s doors.

I have no opinion about the claims and counter claims between the hotel company and the Chinese contractor about shoddy and incomplete construction. There are two sides to every dispute. The advantage of Chapter 11 is that the dispute can be settled as part of a total re-structuring, approved by both the US and Bahamian courts.

One lesson from this imbroglio is that our Attorney General, and all her predecessors, have been sadly remiss in failing to create new legislation to give the Bahamas something similar to Chapter 11. As our economy grows and becomes more complex, inevitably we will see more companies in tight financial straits.

We will need a modern way to handle their problems, to replace the blunt instrument of “liquidation-or-nothing” that is today’s only tool.

The Attorney General and her advisors have been successful in drafting many other ingenious finance laws; they should now turn to the issues of bankruptcy and insolvency.

But for the moment, I urge that Baha Mar’s Chapter 11 Order be fully accepted and enforced, under the eyes of our Supreme Court. It will benefit all stakeholders and the Bahamian economy - despite being invented in the US, like Coca-Cola.

• Richard Coulson is a retired lawyer and investment banker resident in the Bahamas. As a lawyer in New York City he has expeirence of US bankruptcy procedures. He is a financial consultant and author of A Corkscrew Life - adventures of a travelling financier.