This article first appeared in Volume 11, Issue 5 of International Corporate Rescue, published by Chase Cambria Publishing.
On 16 April 2014, the Cayman Islands Court of Appeal handed down the much anticipated, albeit interim, decision in Irving H Picard and Bernard L Madoff Investment Securities LLC v Primeo Fund. In summary, the Court of Appeal (reversing the judge at first instance) has found that there is statutory jurisdiction, under the Cayman Islands Companies Law (the 'Law'), to assist foreign representatives of non-Cayman Islands companies by way of applying Cayman Islands transaction avoidance provisions in aid of foreign proceedings (i.e. claw-back provisions based on fraudulent transfers or preference payments). The Court of Appeal has also confirmed (agreeing with the judge at first instance) that this jurisdiction does not extend to permitting the Court to apply transaction avoidance provisions under the relevant foreign law in the Cayman Islands. The Cayman Islands has not adopted the UNCITRAL Model Law on Cross Border Insolvency but the Cayman Islands courts are very familiar with dealing with cross border proceedings. Most companies incorporated in the Cayman Islands have their assets and operations abroad so there is almost no such thing as a purely domestic proceeding. As a result, and as can be seen from this decision, the Cayman Islands courts are very keen to promote comity in cross border insolvency proceedings regardless of whether the company in question is incorporated in the Cayman Islands or otherwise.
Mr Picard's application to the Cayman Islands courts for assistance was made pursuant to Part XVII of the Law which sets out express provisions dealing with international cooperation and the manner in which the Cayman Islands courts can give statutory assistance to 'foreign representatives'. These provisions are loosely based on the now-repealed section 304 of the US Bankruptcy Code and apply to overseas companies that are in bankruptcy proceedings outside of the Cayman Islands. They have no application to Cayman Islands incorporated companies even where those companies have been placed into insolvency proceedings in another jurisdiction.
Section 241 of the Law provides that the court may make orders ancillary to a foreign bankruptcy proceeding for the purposes of:
a) Recognising the right of a foreign representative to act in the Cayman Islands on behalf of a foreign debtor1 (s. 241(1)(a)).
b) Granting a stay on commencement or continuation of legal proceedings and the enforcement of judgments against a debtor (s.241(1)(b) and (c)).
c) Permitting the foreign representative to examine any person in possession of information relating to the debtor and requiring the production of documents to the foreign representative (s.241(1)(d)).
d) Ordering the turnover to a foreign representative of any property belonging to a debtor (s. 241(1) (e)).
Section 242 provides that in deciding whether to make such an ancillary order, the court will be guided by matters which will best assure an economic and expeditious administration of the debtor's estate consistent with:
a) the just treatment of all claimants in a debtor's estate wherever they may be domiciled;
b) the protection of Cayman Islands incorporated claimants against prejudice and inconvenience in the processing of claims in the foreign bankruptcy proceeding;
c) the prevention of preferential or fraudulent dispositions of property comprised in the debtor's estate;
d) the distribution of the debtor's estate amongst creditors substantially in accordance with the priorities set out in the Law;
e) the recognition and enforcement of the interests of secured creditors;2
f) the non-enforcement of foreign taxes, fines and penalties;3 and
Part XVII was incorporated into the Law in 2009 and the Primeo case is the first time the provisions of section have been considered in detail by the Cayman Islands courts.
Proceedings in the Grand Court
In February 2010, Mr Picard applied to the Grand Court of the Cayman Islands (the 'Grand Court') for recognition of his appointment as the bankruptcy trustee of Bernard L Madoff Investment Securities LLC ('BLMIS') by the US Bankruptcy Court for the Southern District of New York (the 'Trustee'). The Grand Court duly granted this recognition pursuant to section 241 of the Law.4
On 9 December 2010, the Trustee filed proceedings in the Grand Court seeking to claw-back approximately USD 145 million in payments that had been made by BLMIS to the Primeo Fund, a Cayman Islands company which had since gone into liquidation, prior to the commencement of the liquidation of BLMIS. The Trustee based his claims on the statutory transaction avoidance provisions of both the US Bankruptcy Code and the Law. While there are similarities between the legislative provisions in each jurisdiction, the relevant provisions of the US Bankruptcy Code were considered to be more favourable to the Trustee. The Trustee argued that the Grand Court had jurisdiction to apply the transaction avoidance provisions of the US Bankruptcy Code in order to assist the foreign proceedings either pursuant to Part XVII or at common law. Unsurprisingly, the liquidators of the Primeo Fund disagreed.
Accordingly, in January 2011, the Grand Court ordered that the following questions be determined by way of a preliminary issues hearing before the Trustee could proceed with his claims: (a) whether the Grand Court had jurisdiction to hear transaction avoidance claims brought by a foreign representative either under Part XVII of the Law or at common law; and (b) if so, whether the claims should be brought under the US Bankruptcy Code or the Law.
The Grand Court found as follows:
a) Section 241(1) did not confer a single broad power to make orders ancillary to foreign bankruptcy proceedings with sub-clauses (a) to (e) of that section being merely illustrative examples. Rather, section 241(1)(a) to (e) contained an exhaustive list of the Court's statutory powers to grant ancillary relief in aid of foreign bankruptcy proceedings.
b) The Court had no jurisdiction to apply the transaction avoidance provisions of the US Bankruptcy Code under Part XVII of the Law. This would not have been possible at common law and had the Legislature intended to override the common law position in Part XVII, this would have been stated expressly.
c) Furthermore, the Court did not have jurisdiction to apply the Cayman Islands transaction avoidance provisions in aid of foreign proceedings under Part XVII of the Law. The Grand Court considered that, as a matter of Cayman Islands law, the ability to bring transaction avoidance claims under the Law was property that vested in a liquidator by virtue of his office rather than being property of the estate.5 As a result, section 241(1)(e) could have no application because the transaction avoidance provisions were not property of the debtor that could be 'turned over' to the foreign representative within the meaning of that section.
d) However, the Court had jurisdiction to apply the Cayman Islands transaction avoidance provisions (but not the US provisions) in aid of foreign proceedings at common law even in circumstances where the Court would have no jurisdiction to make a winding up order over the debtor (which was the case here). In reaching this conclusion, the Grand Court had to grapple with the effect of the decision of the English Supreme Court in Rubin v Eurofinance6 which concluded by a majority that the decision of the Privy Council in Cambridge Gas v Committee of Navigator Holdings7 was wrong. An added complication for offshore lawyers – and Cayman Islands lawyers in particular – is that decisions of the Privy Council are binding in the Cayman Islands while decisions of the English Supreme Court are not binding, but are highly persuasive. In Primeo, the Grand Court held that Rubin was not a complete repudiation of the principle in Cambridge Gas, that at common law a domestic court had jurisdiction to recognise and assist a foreign representative by doing whatever it could have done in the case of purely domestic insolvency proceedings. Rather Rubin was limited to finding that the enforcement of foreign insolvency judgments was not governed by special rules. As such, the Grand Court found that recognition of the foreign representative at common law carried with it the active assistance of the Court and the scope of available assistance included application of the transaction avoidance provisions under the Law.
Proceedings in the Court of Appeal
The Trustee appealed and the Primeo Fund cross-appealed. The parties agreed that there were three issues for the Court of Appeal to determine:
a) Whether the Court has jurisdiction under sections 241 and 242 of the Law to apply foreign transaction avoidance provisions (and particularly the US provisions) in aid of foreign insolvency proceedings;
b) Whether the Court has jurisdiction under sections 241 and 242 of the Law to apply Cayman Islands transaction avoidance provisions in aid of foreign insolvency proceedings; and
c) Whether the Court has jurisdiction at common law to apply Cayman Islands transaction avoidance provisions in aid of foreign proceedings generally or only in circumstances where it would have jurisdiction to make a winding up order over the foreign debtor.
The Court of Appeal first addressed the question as to whether sections 241 and 242 gave the Court jurisdiction to apply any transaction avoidance provisions (whether pursuant to the Cayman Islands legislation or otherwise) in aid of foreign insolvency proceedings and concluded as follows:
a) Section 241 of the Law does not confer a general power on the Court to make such orders as it sees fit in aid of foreign proceedings. The power conferred by section 241 can only be exercised for one or more of the purposes described at sub-sections 241(1)(a) to (e). This is consistent with the finding of the judge at first instance.
b) The language used in section 242 was included as a guide for the Court in exercising the power to make ancillary orders for all of the purposes set out in section 241. The express reference in section 242(1)(c) to taking account of matters 'consistent with the prevention of preferential or fraudulent dispositions of property' is a clear indication that in making ancillary orders to assist a foreign representative, the Court could have regard to the need to avoid fraudulent or preferential dispositions.
c) Contrary to the conclusions of the judge at first instance, the making of a transaction avoidance order in aid of foreign insolvency proceedings can be considered as making an order 'ancillary to the turnover to a foreign representative of any property belonging to the debtor' pursuant to section 241(1)(e) of the Law. This is because the avoidance of preferential or fraudulent dispositions of property has the effect of restoring property to the debtor to enable it to be turned over to the foreign representative. This is a broader interpretation of making an order 'ancillary to the turnover ... of any property' than that applied by the Grand Court. The Court of Appeal appears to have concluded that any orders that assist with swelling the property of the insolvent estate can be considered 'ancillary to the turnover' of property to a foreign representative.
d) It is not appropriate to construe the meaning of section 241 and section 242 by reference to US cases on section 304 of the Bankruptcy Code notwithstanding that there are similarities between the language used in these sections. This was because there was nothing in the legislative history of Part XVII that suggested the Legislature intended that words and expressions used in the Part XVII should be given their technical meaning and interpretation as applied under the US Bankruptcy Code. The Court was therefore required to construe the legislation in accordance with Cayman Islands principles.
In respect of the second question, the Court of Appeal concluded that:
a) Because the Court was required to construe the legislative provisions in accordance with Cayman Islands principles rather than by reference to US cases on section 304 of the Bankruptcy Code, it was not relevant that the US Courts could have applied foreign legislative provisions in aid of foreign insolvency proceedings pursuant to section 304 of the US Bankruptcy Code.
b) It would be a radical departure from the common law position for the Court to be able to apply foreign legislative provisions in aid of a foreign proceeding. Agreeing with the judge at first instance, if the Legislature had intended this departure, it would have said so in clear terms, which was not the case.
c) Accordingly, notwithstanding the apparent illogicality of applying domestic law to transaction avoidance issues when the distribution regime is governed by a foreign law, there was no jurisdiction under Part XVII to apply foreign avoidance provisions in aid of foreign proceedings.
In respect of the third question, during the course of the appeal it emerged that the Privy Council would shortly be hearing an appeal in the case of PricewaterhouseCoopers v Saad Investments Company Limited (on appeal from the Bermuda Court of Appeal8), that would impact on the third question and accordingly the Court of Appeal provided an interim judgment addressing the first two questions only.
It is anticipated that the Privy Council in PricewaterhouseCoopers v Saad will give detailed consideration to the apparent conflict between Rubin v Eurofinance and Cambridge Gas v Committee of Navigator Holdings and also to the Privy Council decision in Al Sabah v Grupo Torres SA.9
The Al Sabah decision, which arose out of an appeal from the Cayman Islands Court of Appeal, considered the scope of assistance available to foreign representatives appointed in overseas personal bankruptcy proceedings under the Cayman Islands Bankruptcy Law (1997 Revision). The Privy Council found that if the Court had no statutory jurisdiction to act in aid of a foreign bankruptcy, it might have had some limited inherent jurisdiction to do so. However, the Court had no inherent jurisdiction to exercise the statutory powers in circumstances not falling within the terms of the section.
At first instance in the Primeo decision, the judge interpreted Al Sabah as meaning that inherent jurisdiction at common law cannot bring into play a statutory provision to achieve a purpose which is different from the objects of the statute. In other words, the common law cannot be used to thwart a statutory purpose. The judge considered however, without providing further explanation, that permitting the Trustee to use the avoidance provisions of the Law against the Primeo Fund, relying on common law principles, did not depart from or thwart the statutory objectives of Part XVII of the Law.
Al Sabah and its interplay with Cambridge Gas and Rubin was given detailed consideration by the Bermudan Court of Appeal in PricewaterhouseCoopers v Saad. In that case, liquidators of a Cayman Islands company sought assistance from the Bermudan courts requesting that an order be made against the company's former auditors for the production of certain documents. Assistance was sought either under the court's common law jurisdiction or pursuant to the Bermudan statutory provisions that would have been available to Bermudan liquidators. Ultimately, the Bermudan Court of Appeal found that the Cayman Islands liquidators could not rely on the statutory provisions and the Court simply had no jurisdiction to grant assistance at common law, in the circumstances of this case, where a statutory scheme for granting assistance existed but did not apply on the facts. It is to be noted that the Bermudan Court of Appeal considered that the decisions in Al Sabah, Cambridge Gas and Rubin all supported this conclusion.
The Primeo decision provides very helpful guidance on the scope of relief available to foreign representatives who seek assistance from the Cayman Islands courts pursuant to Part XVII. The Court of Appeal has given a broad interpretation to the meaning of making ancillary orders for the purpose of ordering the turnover of property to a foreign representative. It appears that the Court is prepared to afford a foreign representative all and any powers that would be available to a Cayman Islands liquidator that would result in assets being returned to the debtor's estate.
No further light however, has yet been shed on the scope of the jurisdiction at common law to grant assistance and how the Cayman Islands courts should deal with the interplay between the competing decisions in this area. It is to be hoped that the decision of the Privy Council in PricewaterhouseCoopers v Saad will bring some much needed clarity to this question.
1 Note that section 241(1)(a) of the Law reflects the common law principle that the identity and authority of the debtor's duly authorised agents is to be determined by the law of the jurisdiction of incorporation.
2 The Cayman Islands is a creditor friendly jurisdiction and the interests of secured creditors are protected on insolvency. Secured creditors are entitled to enforce their security outside of a liquidation and without reference to the liquidator. There is no general ability to cram down the interests of secured creditors, stay the enforcement of their security or compel them to release their security.
3 Consistent with the position in the majority of common law jurisdictions, see Government of India v Taylor  1 All ER 292.
4 Re Bernard L Madoff Investment Securities LLC  1 CILR 231.
5 Following the decision in Re Reserve International Liquidity Fund Ltd (in liquidation) (Grand Court, unrep. 1 April 2010) and the line of English authorities including Re MC Bacon Ltd (No 2)  Ch 127 and Re Ayala Holdings Ltd (No 2)  1 BCLC 467.
6  UKSC 46.
7  1 AC 508.
8  CA (BDA) 7 CIV. The Privy Council heard the appeal in April 2014 and has reserved its decision.
9  2 AC 333.
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.