Avoidance claims in the Cayman Islands by a foreign insolvency office holder

By Christopher Young, partner

christopher.young@forbeshare.com

Cross border insolvency law in the Cayman Islands, and more particularly the extent of the assistance that may be available to foreign insolvency office holders, has recently come under the spotlight in the decision of the Grand Court of the Cayman Islands in Irving H Picard and Bernard L Madoff Investment Securities LLC v Primeo Fund[1]. 

In enacting statutory provisions in 2007[2] to deal with the recognition of and assistance to be provided to, foreign office holders appointed in foreign bankruptcies, the Cayman Islands did not (unlike, for instance, the United Kingdom or the United States of America) adopt the relevant provisions of the UNCITRAL Model Law.  The decision in Primeo provides important and welcome guidance on both the statutory jurisdiction to make orders ancillary to a foreign insolvency proceeding, and the common law jurisdiction to provide assistance in connection with such proceedings.  In particular, it addresses how far the Grand Court will now go to give effect to the principle of “modified universalism,” that where possible there should be a unitary insolvency proceeding in the courts of the insolvent’s domicile which receives worldwide recognition and should apply universally to all the debtor’s assets. The judgment is particularly significant in that it comes after the UK Supreme Court’s decision in Rubin v Eurofinance which some commentators have suggested sounded the death knell for the principal.[3]

Facts

Primeo was a first instance decision of Justice Jones on preliminary issues arising out of claims made by the United States’ trustee (Irving Picard) in bankruptcy (the “Trustee”) of Bernard L Madoff Investment Securities LLC (“BLMIS”), a company incorporated under the laws of and with a principal place of business in New York, to claw back payments made to Primeo by BLMIS prior to its bankruptcy (the “claw-back claims”).  BLMIS’ investment advisory business was carried out fraudulently and its owner and controller, Bernard L Madoff, had admitted to using BLMIS as a vehicle to operate the world’s largest known ponzi scheme.  Primeo, a Cayman Islands’ investment fund, had placed its funds with BLMIS for investment (both directly and indirectly).  BLMIS’ only connection to the Cayman Islands, prior to its insolvency, was that Primeo and a number of other funds had placed funds with it for investment.[4]

Issues

The Trustee had previously been recognised by the Grand Court in February 2010 as the only person entitled to act on behalf of BLMIS, and he then sought to pursue the claw-back claims against Primeo in the Cayman Islands.  The Trustee’s secondary position was that he ought to be able to pursue Primeo using the insolvency transaction avoidance provisions of Cayman Islands’ law, which usually only liquidators appointed by the Grand Court are entitled to use.  The issues for the Grand Court to consider included: (i) whether the Grand Court had jurisdiction to permit such claims to be pursued under the recognition and assistance provisions set out in Part XVII of the Companies Law or at common law; and (ii) if there was jurisdiction, whether the claw-back claims could be based upon the application of substantive United States’ law or could only be brought in accordance with Cayman Islands’ insolvency law.

Findings

Justice Jones found that: (i) the Trustee could only pursue  his claw back-claims against Primeo under the common law and not under Part XVII of the Companies Law; and (ii) the relevant law to be applied to such claims would be that of the Cayman Islands and not the substantive United States’ law.

Section 241 in Part XVII of the Companies Law sets out the purposes (and a number of mechanisms) for which the Grand Court may make orders ancillary to foreign insolvency proceedings.  Under section 241(1)(e), the Grand Court is entitled to make an order  for the purpose of ordering the turnover to a foreign representative of “any property belonging to a debtor”.  The Trustee argued that this section was sufficiently broad to encompass his claw-back claims.  However, the Judge noted the conceptual difference between “property of the debtor” (which are assets of the company itself) and “property of the debtor’s estate” (which include assets which the office holder may subsequently recover) and found that “property” under section 241 did not extend to property of the debtor’s estate.  The claw-back claims did not exist as a matter of law until the commencement of BLMIS’s bankruptcy and therefore could not amount to being property which Primeo could be compelled to turn over.  The Trustee’s further argument that Section 241 conferred a general power on the Court to make ancillary orders which should be construed so as to include a power to permit the pursuit of transaction avoidance claims was firmly rejected.  The Judge found that the section sets out “an exhaustive list” of what ancillary orders may be made, and that there is no “general catch all provision” that would permit the pursuit of the claw-back claims.  The Judge further found that even if, contrary to his view, section 241 permitted the pursuit of preference or avoidance claims it was not open to the Grand Court to allow the application of foreign law, as this was the position at common law and there was nothing in Part XVII to support such a contention.[5]

Having found that there was no statutory jurisdiction to assist the Trustee in pursuit of his claw-back claims, the Grand Court made it clear that there remained a common law jurisdiction to grant assistance to foreign office holders.  Jones J stated “Part XVII supplements and partially codifies the common law.  It does not abolish the common law rules which continue to exist alongside the new statutory provision.” However, such common law assistance did not extend to allowing the application of substantive United States’ law rather than the law of the Cayman Islands in respect of the claw-back claims.  In the Judge’s view, if the application of the foreign law to transaction avoidance claims had been intended then the Cayman Island’s legislature would have stated this expressly within Part XVII.

The Effects of the UK Supreme Court judgment in the Rubin case

In determining that there is jurisdiction at common law to permit the pursuit of transaction avoidance it was necessary for the Grand Court to consider the application of the Supreme Court’s decision in Rubin, which heavily criticises the Privy Council decision in Cambridge Gas v Navigator[6], which had previously been the leading authority governing the extent to which the common law would grant assistance to foreign office holders.  In Rubin, a majority of the Supreme Court found that Cambridge Gas had been wrongly decided, and it was therefore necessary for the Grand Court to determine the extent of the assistance it could provide under the common law to the Trustee.  In Primeo, the Grand Court found that Rubin was limited to clarifying that the domestic enforcement of foreign insolvency judgments was not governed by special rules.  Jones J considered that the Supreme Court had not completely rejected the principles of modified universalism in Cambridge Gas, but that it had rejected the proposition that giving assistance to foreign office holders extended to the enforcement of foreign judgments obtained by foreign office holders which would not otherwise be enforceable in accordance with established conflict of laws principles. In the judgment of Jones J, the Supreme Court “did not reject the underlying proposition that recognition at common law ‘carries with it the active assistance of the Court’”.  The Grand Court went on to find that it was open to it to apply the common law rules set out in Cambridge Gas, and consequently that it could actively assist the Trustee, and that such “active assistance” included providing the Trustee with the ability to pursue a transaction avoidance action against Primeo under Cayman Islands’ law.

Conclusion

As a consequence of the decision in Primeo, it would now appear that foreign office holders, once recognised under Part XVII, can potentially pursue claims against Cayman Islands’ domiciled entities that would ordinarily only be available to Cayman Islands’ appointed liquidators and where the only connection with the islands would be that the proposed defendant is located in Cayman.  Justice Jones held that the fact that there was an insufficient connection with the Cayman Islands to have permitted BLMIS to be ordered to be wound up by the Grand Court so that it would not have been possible for the Trustee to have been appointed as a liquidator of BLMIS by the Grand Court did not operate as a jurisdictional bar to granting the Trustee permission to pursue claims of a type that would ordinarily only be available to a Cayman Islands’ liquidator.    However, before the Trustee can pursue Primeo using Cayman Islands’ law, he must first obtain a decision as to whether or not he is permitted by the Grand Court to do so.  The decision in Primeo establishes that there is jurisdiction at common law to permit such claims to be brought but the Grand Court has yet to decide whether in the exercise of its discretion it should allow the specific claims of the Trustee to proceed.

The first instance decision in Primeo is both significant and controversial. We understand that it is under appeal by both the liquidators of Primeo and by the Trustee, and we shall eagerly await case developments at the Cayman Islands’ Court of Appeal.