Bermuda: Offshore Case Digest: Bermuda, British Virgin Islands, Cayman Islands - Issue #7 - March 2014 - June 2014

Bermuda

Supreme Court

April

WINDING UP – THE COMPANIES ACT, 1981 – BERMUDA INTERNATIONAL CONCILIATION AND ARBITRATION ACT, 1993 – ABILITY OF SECURED CREDITOR TO PETITION – STAY OF EXECUTION OF ENFORCEMENT ORDER

In the Matter of LAEP Investments Ltd ("the Company") [2014] SC (Bda) 23 Com (1 April 2014)

The Court was asked to consider three applications before the Court: (1) An amended petition to wind up; (2) A Summons of the Company to dismiss the petition and set aside the appointment of the Joint Provisional Liquidators ("JPLs"); and (3) A Summons of the Company to stay execution of a Court Order granting leave to the Petitioner to enforce an arbitral award against the Company in Brazil (the "Enforcement Order").

Winding Up Petition: The Judge considered the Company's arguments that the winding up was sought to subvert the judicial process in Brazil and that the debts were already fully secured in Brazil. The Court was not satisfied with the evidence on either point. It was noted that the fact that a creditor is secured did not prevent it bringing a winding up petition (Moor -v- Anglo-Italian Bank [1979] 10 Ch 681 applied). The Judge ordered the winding up of the Company.

Stay of Execution of Enforcement Order: The Judge confirmed that the test as to whether to stay enforcement was effectively a balance of convenience test and did not favour interference with the Petitioner's right to enforce the award. In this respect, the Judge placed weight on the Petitioner's submission that the judicial process pursued by the Company in Brazil (which formed the ground upon which the stay was sought) could take ten years to pursue and that a stay would result in severe financial prejudice. The application for the stay was dismissed.

INTERIM INJUNCTION TO PREVENT PRESENTATION OF PETITION – ABILITY TO SET ASIDE INTERIM INJUNCTION – CROSS CLAIM BY COMPANY EQUIVALENT TO PETITIONER'S DEBT

Agrenco Limited ("Argenco") -v- Credit Suisse Brazil (Bahamas) Limited ("Credit Suisse") [2014] SC (Bda) 24 Com (26 February 2014)

This case concerned an application by Credit Suisse to set aside an interim injunction which restrained it from presenting a petition to wind up Argenco. The Court noted that following the grant of the injunction there had been two material changes: (1) Argenco had conceded that the existence of the debt upon which the Statutory Demand was based was not disputed; and (2) Argenco was no longer in a position to assert that it was solvent on a balance sheet basis.

In determining whether to set aside the injunction, the Court considered the legal principles governing the restraint of the presentation of a winding up petition against a company in circumstances where there is a cross-claim equal to the Petitioner's debt. The Judge stated that he was required to assess whether or not the cross-claim relied upon by Argenco has "sufficient prima facie plausibility to merit further investigation as to [its] truth". Having considered the cross-claim the Judge held that it did not withstand scrutiny. The Judge usefully outlined that the possible extinction of Credit Suisse's claim (when adjudicated by liquidators considering the cross-claim) was not a material factor justifying continuing with the injunction, particularly having regard to the improbable nature of the cross-claim itself.

May

STAY PENDING APPEAL – RULING ON COSTS AND TERMS OF FINAL ORDER – INDEMNITY COSTS – MISCONDUCT – RETURN OF MONIES HELD AS SECURITY FOR COSTS

(1) Stifton Salle Modulable (2) Rütli-Stiftung -v- Butterfield Trust (Bermuda) Limited [2014] SC (Bda) Civ 42 (28 May 2014)

This ruling followed on from a five-week trial that concluded in December 2013. The matter was listed to enable the parties to consider what conditions should be attached to a stay pending appeal (which it was common ground that the Defendant was entitled to seek) and, in particular, to hear submissions on costs.

In considering costs, the Judge held that the Plaintiffs had achieved substantial success in their claim and should be awarded their costs. The Judge considered the dictum of Devlin J in Anglo-Cyprian Trade Agencies Ltd -v- Paphos Wine Industries Ltd. [1951] 1 All ER 873 at 874, cited with approval by Hellman J in Williams -v- Bermuda Hospitals Board [2013] Bda LR 14 which set out that: (1) A successful Plaintiff ought not to be deprived of costs unless he is found to be guilty of misconduct; and (2) A plaintiff who recovers nominal damages ought not to be regarded in the ordinary sense as 'successful'. In considering this test, the Judge held that the success of the Plaintiff was more than 'pyrrhic' and they should be awarded their costs.

The Judge went on to consider the principle articulated by the Court of Appeal in First Atlantic Commerce Ltd. -v- Bank of Bermuda Ltd.

[2009] Bda LR 18 which provided for a reduced proportion of costs when 'superfluous' issues were raised unnecessarily. In considering the various arguments advanced by the Defendants as to why costs should be reduced, the Judge awarded a 10% reduction in costs for failure to establish a particular argument on feasibility. The Defendants had submitted that the feasibility argument had been advanced through five witnesses who consumed 20% of the trial.

Having succeeded on costs, the Plaintiffs sought return of the monies paid into Court as security for costs. The Defendant objected on the grounds that it proposed to appeal and would have no convenient way to enforce any costs orders which may be obtained in its favour as a result of its proposed appeal. The Plaintiffs cited authority in support of their right to payment out; the Defendant cited no authorities supportive of their opposition. In reviewing the unanimous decision of the English Court of Appeal in Tristan Investments Ltd -v- Methdrell Industries et al [1965] EWCA Civ JO111-3, it was held that the monies held should be returned to the Plaintiffs.

INTERNATIONAL COOPERATION (TAX INFORMATION EXCHANGE AGREEMENTS) ACT, 2005 (THE "ACT") – PRODUCTION ORDERS – FAILURE TO SPECIFY HOW INFORMATION IS TO BE PROVIDED – REQUESTS THAT DO NOT CONFORM WITH THE REQUIREMENTS OF THE RELEVANT TAX INFORMATION EXCHANGE AGREEMENT ("TIEA")

Ministry of Finance -and- (1) E (2) F (3) H [2014] SC (Bda) Civ 43 (30 May 2014)

Certain amendments to the Act came into force in December 2013 which required the Minister of Finance to make applications for information or document production to the Court. A successful application results in a production order. The party served with the Order may apply to the Court to set it aside or vary it. In this case the Defendants sought to do just that.

The production order in question sought information on various matters such as the Defendants' activities, the means used to carry them out and the date and means of acquisition of licenses, patents and intangible assets.

The Defendants submitted that they were unable to give effect to the request on the basis that the request required information but failed to specify how that information was to be provided. The Defendants submitted that this put the Defendants in the invidious position of having to provide information but not knowing what is required to satisfy that requirement. The Judge held that there was no merit to this objection as "Information" is defined broadly in the Act and includes "... any fact ... in any form whatsoever that is relevant or material to tax administration or enforcement". That definition does not require that the fact must be provided in the form of a pre-existing document.

The Judge was also asked to order that the Plaintiff should bear the costs of one of the Defendant's compliance with the production order on the grounds that it was an independent third party operating at arm's length from the taxpayer under investigation. Consideration of this point was adjourned to give the parties the opportunity to make more detailed submissions.

Of particular interest, it was submitted by Counsel for the Minister that any non-conformity with the requirements of the relevant TIEA was outweighed by the concern of a possible accusation by the requesting State that Bermuda was not complying with its treaty obligations. In response to this argument, the Judge stated, obiter, that it was extremely doubtful that it would be lawful to honour a request on these grounds alone in circumstances where the request did not conform to the TIEA.

June

ORDER 24 RULE 10 – INSPECTION – PRODUCTION THAT IS NECESSARY FOR FAIR DISPOSAL OR SAVING COSTS – RELEVANT DOCUMENTS – RES JUDICATA – TRUSTEES DUTIES OF FULL AND FRANK DISCLOSURE

Between: (1) Trustee 1; (2) Trustee 2; (3) Trustee 3; (4) Trustee 4; -and- (1) the Attorney General; (2) Respondent 2; (3) Respondent 3 [2014] SC (Bda) 52 Com (5 June 2014)

The Court had previously ruled on two applications for disclosure made by the Second Defendant in the course of Beddoe proceedings commenced by the Plaintiffs ("The Trustees"). The Court was now asked to consider: (1) A first summons seeking inspection of a number of documents said to have been mentioned in the Trustees' evidence in reply; and (2) A second summons seeking the production of various categories of documents pursuant to the Court's supervisory jurisdiction to administer trusts.

In respect of the first summons, it was noted that the request must relate to a document to which "reference is made" in the affidavit in the sense of a "direct allusion". However, the Court will not order the production of a document unless it is of the opinion that its production is necessary either for disposing fairly of the cause or matter or for saving costs. The Judge dismissed the First Summons as the requests did not relate to documents to which a direct allusion was made, save in one case where production of the requested documents was not necessary for disposing fairly of the matter or for saving costs.

In respect of the second summons, the Trustees raised the preliminary issue of res judicata, arguing that the issue had already been before the Court at a hearing earlier this year. See Offshore Case Digest Issue #6. At that hearing the narrow issue of whether the Trustees' duty of full and frank disclosure included a duty to disclose documents was considered together with the broader issue of whether the Court had jurisdiction to compel the production of documents by the Trustees. During that hearing the Court was only asked to render a decision on the narrow issue but, in determining the point of res judicata, the Judge held that the broader issue was impliedly raised. The Judge upheld the Trustees' objection and noted that the Court's ruling on the legal principles applicable to the applications for the production of documents at the earlier hearing would also be applicable to any further application for the production of documents in the continuing Beddoe proceedings.

SHAREHOLDER AGREEMENT – INTERPRETATION OF INDEMNITY PROVISION – PAYMENT OF INSURANCE LOSSES

Mutual Holdings (Bermuda) Limited -v- Matsen Insurance Brokers, Inc [2014] SC (Bda) 54 Com (25 June 2014)

The Plaintiff sought damages in the amount of US$165,703 plus interest as monies due from the Defendant under a shareholder agreement. The Plaintiff's case was that the shareholder agreement was concluded as one aspect of the Defendant's participation in an Insurance Profit Centre "rent-a-captive" programme ("the Programme"), offered by the Plaintiff and its affiliate Mutual Indemnity (Bermuda) Limited ("Mutual Indemnity"). The Shareholder Agreement entitled the Defendant to a dividend if the Programme was profitable, but obliged the Defendant to indemnify the Plaintiff in respect of any losses suffered by Mutual Indemnity in respect of the insurance risks relating to the Defendant's clients.

The issues in controversy substantially turned on the interpretation of dividend and indemnity provisions of the Shareholder Agreement. Mutual Indemnity had paid out US$165,703 in respect of losses on the Programme. As such, the Plaintiff argued that the Defendant was obliged to indemnify the Plaintiff in this amount pursuant to clause 3A of the Shareholder Agreement.

In considering the relevant provisions of the Shareholder Agreement, the Judge considered the proper approach to construing the indemnity obligations of a preferred shareholder and adopted the approach of Bell J in Mutual Holdings (Bda) Limited -v- American Patriot et al [2010] Bda LR 46. He noted that the Court of Appeal for Bermuda went on to affirm that the intent of the relevant provisions of the Shareholder Agreement was to indemnify the Mutual companies for "any losses that the Program had suffered": American Patriot Insurance Agency -v- Mutual Holdings (Bda) Limited [2011] Bda LR 47.

The Judge found that the argument advanced by the Defendant contended that the clear words of an indemnity ought to be ignored to achieve a result which is commercially favourable to the Defendant but inconsistent with the commercial object of the indemnity clause. The Judge held that if the commercial purpose of the relevant clause was to ensure that the preferred shareholder indemnified the Plaintiff for all losses suffered on the Programme, it made no sense to construe the clause as not applying to payments actually made by Mutual Indemnity. Such a construction would be inconsistent with the plain terms of the contract.

The Judge went on to note that the exclusionary words of clause 3A "provided, however, that the definition of incurred losses and loss expenses in paragraph 2(C) shall for this purpose only include losses and loss expenses which have been paid or are likely to be paid within the following ninety (90) days" ought only to be engaged in circumstances where the relevant loss figures relied upon to support a claim on the indemnity relate to amounts which Mutual Indemnity has not paid and/or is unlikely to pay within the next ninety days.

APPLICATION FOR PROTECTIVE COSTS ORDER – PUBLIC INTEREST – CAPPED COSTS

The Bermuda Environmental Sustainability Taskforce ("BEST") -and- The Minister of Home Affairs [2014] SC (Bda) 56 Com (25 June 2014)

BEST had appealed against the Minister's decision dismissing BEST 's appeal to him against the decision of the Development and Applications Board (the "DA B") granting conditional approval to four planning applications. The present interlocutory application, sought, an Order that: "There be a Protective Costs Order made in favour of BEST, pursuant to sections 12 and 18 of the Supreme Court Act 1905, RSC Order 1A, rule 1, RSC Order 62, rules 2(4), 3(2), and/or 3(3), section 61(2) of the Development and Planning Act 1974, and/or the inherent jurisdiction of the Court".

There was no known precedent for the Bermuda Court granting a Protective Costs Order (a "PCO "). Despite this, it was common ground between the parties that a PCO could validly be granted, based on the Court's flexible statutory discretion to deal with costs and guided by persuasive English case law grounded in a comparable civil procedural regime. Controversy turned on how the principles developed by the English courts should be applied to the facts of the present case. In this case the question was whether BEST , an environmental non-governmental organisation with admittedly limited funds and no private interest at stake, ought in the public interest to be protected from the usual costs consequences of pursuing its appeal, in the event that it failed, and if so, on what terms.

Applying a flexible approach to the guideline principles articulated in the English Court of Appeal case in R (Corner House) -v- Trade and Industry Secretary [2005] EWCA Civ 192, it was found that (1) BEST was raising issues of public importance and it was in the public interest that they be resolved; (2) Having regard to the financial resources of the parties, and the likely costs, it was fair and reasonable to make the PCO ; and (3) There is a risk that BEST might discontinue the proceedings if the PCO is not made. The Judge held that BEST was entitled to a PCO and as such, in the event that its appeal is dismissed, it is protected from any adverse costs order. In the event that its appeal succeeds, its costs are capped at US$75,000.

Offshore Case Digest: Bermuda, British Virgin Islands, Cayman Islands - Issue #7 - March 2014 - June 2014

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