The following case notes outline two significant recent
developments in the Cayman Islands.
Caribbean Islands Development Ltd. (in Official
Liquidation) v First Caribbean International Bank (Cayman) Limited
(unreported)
In a ruling handed down on 8 October 2014, the Cayman Islands
Court sent a strong reminder to litigants of the importance of
providing security for costs in a form appropriate for enforcement
by a Cayman resident defendant and, in doing so, highlighted the
dangers of proposing alternative solutions without the prior
approval of the Court.
The plaintiff, a Cayman Islands company in court-ordered
liquidation and acting through its joint official liquidators at
Rawlinson & Hunter (the JOLs), had
issued proceedings against a local bank alleging that it had failed
to fulfill its duties to the plaintiff in selling a property on its
behalf.
On 7 March 2014 the Court had ordered that the plaintiff provide
security for the defendant's costs of the litigation within 21
days, in the amount of US$100,000. Although the plaintiff had
sufficient money in its bank account, the JOLs claimed they had
been unable to post security by way of cash deposit since the
liquidation estate had obligations in the form of unpaid accrued
professional fees, aside from which tying up the amount in question
would have left insufficient cash to run the liquidation. Since
further funding would be needed in any event if the litigation were
to go ahead, the JOLs also approached investors for assistance, but
were unable to obtain the necessary financial backing. The date for
compliance with the security order came and went.
On an application by the defendant, the Court proceeded to make an
'unless order', the terms of which stated that, unless the
plaintiff complied within a further 90 days, its claim would be
struck out and the action dismissed. The JOLs used the additional
time to seek litigation funding and 'after the event' (ATE)
insurance in the London market to enable them to proceed with the
claim and, with only a day to spare before the deadline in the
unless order, approached the defendant with a proposal of security
in the form of a deed of indemnity from a respected London insurer,
QBE Insurance (Europe) Limited. The proposal was rejected by the
defendant, but only after the time for compliance with the unless
order had expired. The defendant immediately issued a summons for
dismissal of the action with costs.
In the event, the indemnity was in place two days after the
deadline for compliance with the unless order, with the result that
the JOLs made a retrospective application for a two-day extension
of time so as to bring the plaintiff in line with the order. That
application was rejected. The Court was dismissive of the proposed
form of security, which it said was unsatisfactory because it would
not allow the defendant to enforce against assets in the
jurisdiction and because the wording of the proposed indemnity
suggested that proper account had not been taken of costs orders
already in the defendant's favour when taking out the
insurance. The Honourable Chief Justice was critical of the JOLs,
finding that they ought to have sought directions from the Court as
to their proposed course of action, since this involved a decision
not to pay in the security when they had means to do so and
continuing to act in breach of the orders.
Under Cayman Islands law, an official liquidator may seek the
sanction or direction of the Court in relation to the exercise of
any of his powers or obligations and, provided he is acting
reasonably in doing so, his costs of such an application will
generally be paid out of the assets of the liquidation estate.
Whether to incur the costs of such an application will be a matter
for the liquidator to weigh up, taking into account the
significance of the issue under consideration. Assuming that the
enforceability of the proposed security had been identified as a
potential issue, that issue was sufficiently important, in light of
the consequences of not complying with the unless order, to merit
an application for directions. Nonetheless, it must be said that
the Chief Justice's ruling is surprisingly critical of the JOLs
given the attempts that were made to preserve a claim thought to be
of real value to the estate.
One reason for this appears to be the JOLs' practice of
failing to make a reserve for costs orders made in the
defendant's favour, while at the same time being said to
provision for their own fees. The implication is not that the JOLs
paid themselves prematurely out of the assets (it seems clear that
they had not paid their own fees for some time) but that they had
persevered with trying to fund litigation from third party sources
when there was a risk that they would be unable to cover the costs
of embarking on that litigation. The ruling is a reminder to
official liquidators that there is no obligation to commence
litigation if there are insufficient assets in the estate and that,
on any view, funding should be put in place before issuing the
claim and not at a stage when orders have already been made in
favour of the defendant, which the assets in the estate may be
insufficient to satisfy. In practice, of course, the JOLs had (in
the end) proceeded on the basis of ATE insurance, which they
presumably thought would be sufficient to cover any outstanding
liabilities to the defendant, perhaps without anticipating the
doubts that would be expressed by the defendant (and shared by the
Court) over the validity and enforceability of such
insurance.
The case highlights the difficulties encountered by liquidators
seeking to maximize the value of a liquidation estate with limited
resources, and balancing competing obligations to the Court,
creditors and opponents to litigation. The judgment emphasizes the
importance of identifying potential issues at an early stage and
assessing whether such issues merit an application for Court
sanction, particularly when there is otherwise a risk of
non-compliance with an order of the Court.
In Re ICP Strategic Credit Income Fund Ltd.
and In Re ICP Strategic Credit Income Master Fund
Ltd.
Much has been written in recent months about the circumstances in
which it is appropriate for court-appointed liquidators of a Cayman
Islands company to seek Court sanction to issue proceedings in the
name of the company, and whether and in what form they should seek
funding in order to do so [1]. In this judgment of
4 April 2014, which reflects a decision made in October 2013, Jones
J sets out to clarify the circumstances in which the Court will
sanction proposed litigation overseas funded by alternative funding
agreements.
Background
The joint official liquidators of the ICP funds sought the Cayman
Court's leave to bring proceedings in the US against a
well-known bank and an equally well-known international law firm.
It was proposed that the proceedings be funded pursuant to the
terms of a contingency fee agreement to be entered into with US
attorneys, Reid Collins & Tsai LLP.
The issues raised by the application may not have been novel, but
they were sufficiently topical and unclear as a matter of Cayman
Islands law [2] that the parties requested the
Court to provide its reasons in writing so as to help practitioners
to understand the current attitude of the Court in circumstances
where different approaches to funding options mean more options for
liquidators in terms of where to litigate.
The liquidators needed Court sanction to proceed at all with the
litigation. For its part, the Court therefore needed to be
satisfied that pursuing the claim was in the best interests of
those with a financial interest in the liquidation. For this to be
the case, not only would the Court insist on there being a
"real prospect of success" but it must also be satisfied
that no other circumstances existed which could amount to an
unreasonable risk of prejudice to the creditors or contributories
of the company. As Jones J remarks in his ruling:
"There may be circumstances in which the downside risks
of litigation would fall upon the creditors, whereas the upside
benefit would go, in part, to shareholders who bear no
corresponding risk. It follows that the Court's decision to
sanction the commencement of litigation can never be entirely
divorced from questions about how and by whom it will be
financed".
Public policy
Historically, Cayman Islands law, like English law, has regarded
certain litigation funding agreements as unlawful on grounds of
maintenance (the interference in litigation of a disinterested
party) or champerty (maintenance in return for a share in the
proceeds). This public policy position is rooted in the
unwillingness to promote the inherent conflict of interest that
arises where an attorney is remunerated as a percentage of the
proceeds of litigation rather than on a time spent
basis.
Attitudes to maintenance and champerty have developed over the
years in light of the competing focus on access to justice and
freedom to decide for oneself whether to engage lawyers on a
'no win no fee' basis. Appropriately, however, the policy
considerations that apply in the context of official liquidations
continue to incorporate safeguards to ensure that investors and
creditors are protected as far as possible from the potential risks
associated with litigation funding agreements while still allowing
liquidators the option of using outside funding.
The position in the Cayman Islands can be summarised as follows,
as explained by the learned Judge in his ruling:
1. An assignment of a cause of
action belonging to the company in return for a percentage of the
proceeds of the action is a valid exercise by the official
liquidator of his statutory power to sell the company's
property.
2. An assignment of a
percentage of the proceeds of such a cause of action pursuant to a
litigation funding agreement is also a valid exercise of the
official liquidator's statutory power to sell the company's
property, provided that the funder is given no right to control or
interfere with the conduct of the litigation.
3. A purported assignment of a
right of action or of the proceeds of a right of action vested in
the official liquidator personally, such as a preference claim, is
not authorized under the statutory power to sell the company's
property as this would amount to an unlawful surrender by the
liquidator of his fiduciary power.
In determining whether, for the purposes of category 2 above, a
litigation funding agreement falls foul of the requirements imposed
by the law, the Court will always consider carefully the terms of
the relevant agreement when it is asked to sanction the
liquidator's decision to proceed to issue
proceedings.
Litigation funding agreements
To this end, the Cayman Islands has maintains a distinction
between the following types of agreement:
a. "Limited recourse loan
agreements", whereby the funder (who may or may not be a
stakeholder in the liquidation) provides purely financial
assistance and agrees to receive a share of any proceeds recovered
from the litigation.
b. "Contingency fee
agreements", whereby the funder is a foreign law firm,
and the law firm assumes the conduct of the litigation in return
for a share (usually expressed as a percentage) of the proceeds of
the claim if, and only if, the litigation is successful.
c.
"Conditional fee agreements", whereby the funder
is any law firm, and the law firm is paid on the basis of
discounted hourly rates in any event, with an entitlement to an
increase in fees in the event that the litigation is
successful.
Limited recourse loan agreements and conditional fee agreements
are considered valid in the Cayman Islands
[3].
Contingency fee agreements of the kind described at 'b'
above are void insofar as they relate to litigation that is to be
carried out in the Cayman Islands. However, notwithstanding a
requirement under the Companies Winding Up Rules that Cayman
Islands law must govern the engagement of foreign attorneys by a
Cayman Islands liquidator, Jones J held that the same restriction
would not apply to litigation that was intended to be conducted in
a jurisdiction (such as the US) where such agreements were
permitted as a matter of law. In sanctioning the decision to bring
proceedings in the US on a contingency fee basis, he did however
insist that the agreement make it clear that the attorneys in
question had no control over the outcome of the
litigation.
Conclusion
The reasoning adopted by Jones J for his decision is that Cayman
Islands law does not consider the relevant public policy to be a
universal policy, rather one that applies only to litigation in
domestic courts. In this and the remainder of his ruling, there
appears to be some indication that this is an area of law that
deserves to be amended by statute when it falls to be considered by
the Cayman Islands Law Reform Commission.
The fact that the Court's approach to sanction of
liquidators' powers has become stricter in recent years does
seem to suggest that there may be room to develop the law in this
area to allow more of a case-by-case approach in which each
agreement and its possible prejudice to stakeholders can be
assessed individually. In the meantime, Cayman Islands insolvency
practitioners will continue to consider litigating overseas if they
believe a contingency fee agreement to be in the best interests of
their stakeholders.
Footnotes
1 See also our note (above) on Caribbean Islands Development v First Caribbean International Bank.
2 Indeed the law on maintenance and champerty is a topic that has been submitted for consideration by the Cayman Islands Law Reform Commission.
3 See the unreported case of DD Growth Premium II x Fund and, before that, Quayum v Hexagon Trust Company (Cayman Islands) Limited [2002] CILR 161
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