If there was any uncertainty that the Cayman Islands is a top jurisdiction of choice for complex litigation and restructuring matters, two cases in 2017 prove (beyond a reasonable doubt) that its Grand Court is not only able to take on the big cases, but it is willing to take a commercial approach to ensure justice is served.
In the matter of Ocean Rig UDW Inc (in provisional liquidation) (unreported, 18 September 2017) the Grand Court sanctioned a USD 3.7 billion scheme of arrangement, despite the objections of a minority creditor. In A Company-v- A Funder (unreported, 23 November 2017) the same court confirmed that commercial funding of litigation is not contrary to public policy, even if the funded party is not impecunious.
In re Ocean Rig UDW Inc
Ocean Rig UDW Inc (in provisional liquidation) (UDW), formed part of a group of companies (the group) carrying on business as an offshore ultra-deep water drilling contractor. The group fell into severe financial distress due to the sustained depression in the price of oil. UDW and three other group companies proposed four schemes of arrangement to their creditors seeking to compromise the group's USD 3.7 billion debts (collectively, the schemes). Under the Cayman Islands Companies Law (2016 Revision), the Grand Court has the power to sanction compromises and arrangements between a company and its creditors which may bind all creditors. The Cayman Islands provisions are substantially similar to the provisions under the United Kingdom's 2006 Companies Act.
The four group companies proposing schemes were initially incorporated in the Marshall Islands. In 2016, in preparation for the restructuring, UDW registered by way of continuation as an exempted company in the Cayman Islands and the three other companies registered as foreign companies in the Cayman Islands. The four companies also transferred their centre of main interests to the Cayman Islands before the schemes were proposed (and prior to the appointment of joint provisional liquidators). As part of the restructuring, the group also filed for Chapter 15 bankruptcy protection in New York.
A group of creditors with secured claims against companies in the group and substantial claims against UDW under guarantees (the guarantee creditors) supported the schemes and considered that a single class of creditors (and therefore a single court meeting) was appropriate for voting purposes. However, Highland Capital Management (which only held claims against UDW under UDW unsecured notes) opposed the UDW Scheme and considered that Highland and other noteholders of UDW had different rights to the guarantee creditors. If Highland was correct and two UDW court meetings were required, Highland would have sufficient votes at its meeting to vote down the UDW scheme.
At the convening hearing Highland submitted that it did not share a common interest with the guarantee creditors, due to the guarantee creditors' claims against other companies in the group. As such, Highland considered that the UDW noteholders should form a separate class of creditors from the guarantee creditors and two court meetings should be held (class issue). Notwithstanding the position taken by Highland, the Grand Court found that a single class of creditors was appropriate and that only one court meeting was necessary. Highland's rights were not so dissimilar to the guarantee creditors' rights as to make it impossible for them to consult together with a view to their common interest. The important consideration was the similarity of the creditors' rights against UDW, not their rights in relation to the other group companies.
At the UDW Court Meeting, the scheme was approved by 96% of UDW's creditors. The only creditor to vote against the UDW Scheme was Highland. The other three schemes were approved unanimously.
At the sanction hearing Highland objected to the sanctioning of the UDW scheme on several grounds, including objections previously advanced at the convening hearing (the sanction issue). In coming to the conclusion to reject Highland's objections, the Grand Court found that:
- UDW had complied with the terms of the convening order and the statutory requirements of the Companies Law (2016 Revision);
- at the court meeting, the classes of creditors were fairly represented and the majority acted in a bona fide manner; and
- the UDW Scheme was one that an intelligent and honest scheme creditor, acting in respect of its interests, might reasonably approve, such that the court should exercise its discretion to sanction the scheme.
The judgment in Re Ocean Rig UDW Inc (in provisional liquidation) confirms that the Grand Court will follow the long line of English authority pertaining to schemes of arrangement in relation to class and sanction issues. Insolvency practitioners, creditors and proponents of schemes generally will be comforted that the Grand Court will not readily allow minority creditors to hold to ransom the majority to prevent a reasonable scheme from proceeding.
A Company v A Funder
In A Company v A Funder, the plaintiff applied to the Grand Court for a declaration that the third-party funding agreement it had entered into with the defendant was not illegal on the grounds of maintenance and champerty. While the procedural construct was somewhat artificial, the Grand Court allowed the application to proceed, given the importance of the matter to the plaintiff.
Maintenance involves the procurement by direct or indirect financial assistance of another person to institute or carry on or defend civil proceedings without lawful justification, while champerty is an aggravated form of maintenance whose distinguishing feature is the support for litigation by a stranger in return for a share of the proceeds. These doctrines were developed under English common law as a safeguard to prevent against frivolous litigation and the corruption of the public justice system through the meddling of unrelated parties.
In modern times, as the legal profession developed and procedural rules improved to better protect the justice system, several common law jurisdictions abolished the historical doctrines of maintenance and champerty. In the Cayman Islands, a draft bill has been circulated titled The Private Funding of Legal Services Bill 2015 which would repeal any offences under maintenance and champerty. While the Bill has not yet been enacted into law by the legislature, the Grand Court has recognised that the nature of common law itself needed to change to meet the needs of society. In relation to maintenance and champerty, this has meant an increasing willingness by the Grand Court to allow third-party litigation funding, as long as adequate protections were built into such arrangements to prevent the corruption of public justice. The decision in A Company v A Funder confirms this approach.
After canvassing the recent Cayman Islands authorities and taking into account the developments in several other common law jurisdictions, Segal J found that as a matter of principle, a litigation funding agreement will not be unlawful by reason of maintenance and champerty if it does not have a tendency to corrupt public justice. To ensure a litigation funding agreement does not tend to corrupt public justice, Segal J found that the terms of the agreement should inter alia:
- limit the extent to which the funder can control litigation;
- limit the ability of the funder to terminate the funding agreement without reasonable cause;
- limit the level of communication between the funder and the funded party's solicitors;
- ensure that any costs award against the funded party will be able to be paid;
- ensure that the funded party is able to make informed decisions about the litigation; and
- ensure that the funded party maintains a material interest in the outcome of the litigation.
Provided the above principles are respected and the important policy goals are achieved then commercial funding of litigation, which can promote access to justice, should not be objectionable or subject to enhanced requirements or constraints.
Accordingly, even though the plaintiff was not in liquidation and not impecunious, the Grand Court found that the funding agreement would not be illegal under the doctrines of maintenance and champerty. Segal J found that there are clearly benefits that may flow from allowing plaintiffs with genuine claims the opportunity to litigate them on terms which they consider to be commercially attractive and provide them with a better risk-reward ratio than if they were to fund the costs of litigation themselves. The ruling will likely result in an increase in the usage of such funding agreements, which, for all of the reasons set out by the learned judge, can only be a good thing.
Although these two cases involved different issues of law, together they demonstrate the unified approach of the Grand Court to be mindful of commercial realities as it reaches the correct legal result. Once again in 2017, the Cayman Islands has confirmed itself as a world-class jurisdiction for complex litigation and restructuring, here's to 2018!
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