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Jurisdiction and Applicable Law in Cayman Cross Border Insolvency Cases

27 March 2013

Introduction

A recent Cayman Islands Grand Court decision has considered a number of important issues of cross-border insolvency law, including the jurisdiction of the Cayman Islands courts to determine claw-back claims brought by an officeholder appointed in foreign insolvency proceedings who has been granted recognition in the Cayman Islands, the application of foreign bankruptcy laws in the Cayman Islands and the application of Cayman Islands law to foreign bankruptcies.

The much-anticipated decision in Irving H Picard and Bernard L Madoff Investment Securities LLC v Primeo Fund (Jones J, 14 January 2013) concerns claims made by Mr Picard, the New York court appointed bankruptcy trustee of Bernard L Madoff Investment Securities LLC ("BLMIS") seeking to claw-back payments made by BLMIS prior to its bankruptcy.  BLMIS, which was the vehicle at the centre of Bernard Madoff's Ponzi scheme, had a number of Cayman Islands based investors, but otherwise had no connection with the Cayman Islands.

As a result of an earlier decision of the Cayman Islands court, Mr Picard had obtained recognition of his appointment as bankruptcy trustee of BLMIS in the Cayman Islands.  He now sought to bring claw-back claims against Primeo Fund ("Primeo"), one of the Cayman Islands based investors in BLMIS.  Mr Picard's claims were made under US bankruptcy legislation (which, generally speaking, facilitates claw-backs more readily than its Cayman Islands counterparts), and pursuant to Cayman Islands law, including the preference provisions of the Companies Law (which, on their face, apply only to Cayman Islands liquidators).

By way of a ruling on preliminary issues, the Grand Court considered whether it had jurisdiction to hear such claims both under the recognition provisions in Part XVII the Companies Law and at common law.  The court also considered whether the claims could be made based upon substantive US bankruptcy law or whether they had to be based upon Cayman Islands insolvency law.

Part XVII of the Companies Law did not give the Grand Court jurisdiction to hear Mr Picard's claw-back claims (either under US or Cayman Islands law)

The court began its analysis by observing that Part XVII of the Companies Law "supplements and partially codifies the common law.  It does not abolish the common law rules which continue to exist alongside the new statutory provision". 

As to the interpretation of section 241(1) of the Companies Law, which sets out the purposes for which the Grand Court may make orders ancillary to foreign bankruptcy proceedings, the court rejected Mr Picard's argument that the provision confers a general power upon the court.  Rather, Jones J held that "[o]n its true construction … section 241(1) is intended to be an exhaustive list of the Court's statutory powers to grant ancillary relief in aid of a foreign bankruptcy proceeding"

Accordingly, the only head of power under section 241(1) which could have allowed Mr Picard's claw-back claims was section 241(1)(e), which permits an ancillary order to be made for the purposes of "ordering the turnover to a foreign representative of any property belonging to a debtor".  The court held that this provision was not broad enough to cover the claw-back claims.  Jones J emphasised the distinction between the concepts of "property belonging to a debtor", which is the phrase used in section 241(1)(e) and "property belonging to the estate of the debtor".  The former refers to assets which are the property of a company at the time of the commencement of the liquidation, including claims which it could have pursued prior to the liquidation.  The latter refers to assets available for distribution to the creditors of a company in liquidation, including claims which are only available to the liquidator as a result of a winding up order having been made.  The claw-back claims fell into the latter category and therefore were not within section 241(1)(e).

No application of foreign bankruptcy law under Part XVII of the Companies Law

The court held that, even if the above analysis was wrong and section 241 entitled Mr Picard to pursue his claims in the Cayman Islands, those claims could not be based upon US bankruptcy legislation.  Jones J rejected a series of arguments to that effect, ultimately holding that "[t]his Court's common law jurisdiction to provide assistance in respect of foreign corporate insolvency proceedings (whatever its scope) depends on the application of the domestic law.  If the Legislature had intended this rule to be abolished by the enactment of Part XVII, it would have said so expressly.  If and to the extent the Trustee is entitled to proceed under section 241 at all, on its true construction I think that section 241 requires the application of Cayman Islands law"

The common law did give the Grand Court jurisdiction to apply the claw-back provisions of Cayman Islands insolvency legislation in aid of Mr Picard's claw-back claims

In order to resolve the question of the court's common law jurisdiction to hear Mr Picard's claw-back claims, Jones J had to grapple with the effect of the UK Supreme Court's 2012 decision in Rubin v Eurofinance1 ("Rubin"), in which it was held by a majority that the Privy Council's decision in the well-known Cambridge Gas2 case was wrong.

In Cambridge Gas, the Privy Council decided that at common law, a domestic court had the jurisdiction to recognise and assist a foreign officeholder by doing whatever it could have done in the case of purely domestic insolvency proceedings.  The precise boundaries of such assistance were not delineated, but the Privy Council stated that it was doubtful that the assistance could take the form of applying foreign insolvency law.

The Grand Court held that Rubin was not a complete repudiation of the doctrines laid out in Cambridge Gas.  Rather, Jones J considered that Rubin was limited to clarifying that the enforcement of foreign insolvency judgments was not governed by special rules.  Jones J therefore stated that the Supreme Court "did not reject the underlying proposition [in Cambridge Gas] that recognition at common law 'carries with it the active assistance of the court'".  Accordingly, Jones J found that the Supreme Court did not express a view on the question of whether the assistance available to a foreign officeholder at common law extended to proving him with a "direct remedy", meaning an original cause of action under domestic legislation to be pursued in this jurisdiction.  Jones J considered that it remained open to him to accept Lord Hoffmann's answer to that question from Cambridge Gas and on that basis held that the scope of available assistance includes an avoidance claim under the Cayman Islands Companies Law.

Finally, despite initially being of the view that the common law jurisdiction to provide assistance requires some degree of connection with the Cayman Islands other than the fact that the defendant company is incorporated here, Jones J ultimately did not accept the argument that assistance is only available at common law where the court has jurisdiction to make a winding up order against a foreign plaintiff company under section 91(d) of the Companies Law

Comment

The decision in Cambridge Gas was heavily influenced by principles of universality – broadly, the concept that courts should strive to give bankruptcy proceedings universal application.

The decision in Picard v Primeo is a clear affirmation that so-called "modified universalism", which has characterised the common law approach to cross-border insolvency cases, is not (as some have suggested) dead as a result of the Supreme Court's decision in Rubin, at least in the Cayman Islands.

The decision also serves as a reminder that, although the statutory regime in the Cayman Islands for the recognition of foreign bankruptcy officeholders differs from that in other countries which have adopted the UNCITRAL Model Law, there remain practical and effective mechanisms by which foreign officeholders may seek assistance from the Cayman Islands court.

We understand the decision is being appealed both by Mr Picard and by Primeo – and so it seems the Grand Court's decision will not be the final word on these issues.

1[2012] UKSC 46. 

2Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508.


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