A recent decision of the Grand Court of the Cayman Islands offers helpful guidance in respect of the remedies open to an office-holder appointed in respect of an insolvent foreign company who wishes to bring insolvency claims in the Cayman Islands. In Irving H Picard and Bernard L Madoff Investment Securities LLC -v- Primeo Fund, the Court considered the nature and effect of recognition of a foreign office-holder under Part XVII of the Companies Law and the availability of insolvency remedies to a foreign office holder following the United Kingdom Supreme Court's decision in Rubin -v- Eurofinance.
Mr Picard, the US-appointed trustee for the liquidation of Bernard L Madoff Investment Securities ("BLMIS"), sought to bring claims against Primeo, one of the so-called "feeder funds" which channelled monies to BLMIS, for monies paid by BLMIS to it in the period prior to the commencement of BLMIS' liquidation.
On a trial of preliminary issues, Mr Justice Andrew Jones QC considered whether it was open to the trustee to bring avoidance claims applying either US substantive law, pursuant to Part XVII of the Companies Law, or alternatively applying Cayman Islands law as if BLMIS were being wound up in the Cayman Islands, applying the principles set out in the Privy Council's decision in Cambridge Gas Transportation Corporation -v- Official Committee of Unsecured Creditors of Navigator Holdings plc.
Previously, the Cayman Islands legislation did not make any provision at all for cross-border insolvencies. In 2009, however, the new Part XVII of the Companies Law came into force. It provides a mechanism under which a foreign office holder's appointment can be recognised by the Cayman Court, and ancillary orders made including for the turnover of property belonging to the foreign company. The trustee had previously obtained an order under Part XVII recognising his appointment and now argued that the effect of the statute was to give the Cayman Court power to apply the law governing the BLMIS liquidation, i.e. US bankruptcy law. In the alternative, the trustee argued that he could bring claims under Cayman law, relying on Cambridge Gas, as if BLMIS were being wound up under the jurisdiction of the Cayman Court.
As the Judge put it, "what I have to decide in this case is whether the scope of the assistance available to the Trustee, whether under section 241 or at common law, enables him to pursue transaction avoidance claims against Primeo and, if so, whether this Court should apply the substantive foreign law applicable in the New York bankruptcy proceeding or the domestic law which would be applicable if a winding up order had been made against BLMIS in this jurisdiction." Dealing first with Part XVII of the Companies Law, the Judge held that section 241 sets out an exhaustive list both of the powers available to a foreign office holder under Part XVII and the purposes for which they may be exercised.
The Judge then considered whether the power in section 241(e), to make an order for "the turnover to a foreign representative of any property belonging to a debtor" could extend, as the trustee argued, to setting aside an antecedent transaction and ordering the repayment of money to the trustee. The Judge held that it could not, and that section 241(e) relates only to property belonging to the company prior to the commencement of its liquidation, and not to property which is recoverable only by an office-holder pursuant to transaction avoidance powers. The Judge took the view that Part XVII provides foreign office-holders with a simple procedural mechanism for obtaining ancillary relief, but does not extend to complex disputes such as would arise in an avoidance action.
Turning to the position under the common law, the Judge considered the principle established in Cambridge Gas, and reaffirmed by the English High Court in Schmitt -v- Deichmann, that recognition of a foreign office holder carries with it the active assistance of the Court, by doing whatever it could have done in a domestic insolvency. The Judge asked whether this remains the law following the Supreme Court's decision, in Rubin -v- Eurofinance SA, that Cambridge Gas was wrongly decided. The Judge held that the Supreme Court's reversal of Rubin applies only to the question of enforcement of foreign judgments and did not disturb the principle that recognition at common law carries with it the active assistance of the Court. He therefore held that a foreign office holder does in principle have the right under common law to bring an avoidance claim in the Cayman Islands under Cayman law.
The Judge also considered whether the trustee's right to bring such a claim would be dependent on the nature of BLMIS' connection with the Cayman jurisdiction. It was argued by Primeo that the Court could only extend to a foreign office holder the right to exercise statutory avoidance powers, if it was established that the Cayman Court would itself have had jurisdiction to wind up BLMIS. According to Primeo, if the foreign company did not meet the criteria for a local winding up so as to bring it within the ambit of the Companies Law, it was not open to the Court to allow it to obtain remedies which that statute provides solely to an official liquidator appointed in the context of such a winding up. The Judge rejected this argument, following decisions of the South African and Bermudan courts that the existence of jurisdiction to make a winding up order was irrelevant to the question of common law recognition and assistance.
The final question considered by the Judge was whether Primeo was entitled to the benefit of insolvency set-off as between the trustee's avoidance claims, and claims which Primeo itself asserts against BLMIS as a victim, as it says, of the Madoff fraud. The Judge held that no such set off is available, relying on the well settled principle that pre-liquidation claims cannot be set off against post-liquidation avoidance claims. Equally, the Judge held that Primeo could not rely on the equitable rule in Cherry -v- Boultbee to achieve the same result.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.