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More Schemes for SPhinX

2014年 8月 21日

A recent decisionfrom the Grand Court of the Cayman Islands demonstrates a flexible use of the scheme of arrangement process to achieve a commercial resolution of an application to remove the SPhinX Group's joint official liquidators ("JOLs"). 

The SPhinX Group of Companies consists of 22 Cayman Islands investment funds that were placed into liquidation in the Cayman Islands in 2006 as a result of the collapse of Refco.  The companies were solvent and the JOLs expected to have a large surplus available for distribution to investors.  However, the liquidation raised complex issues caused by the intermingling of assets between the different funds and there were significant difficulties in determining the priority of stakeholder claims in respect of different companies and share classes.  

These issues were resolved by way of a scheme of arrangement pursuant to section 86 of the Companies Law (2013 Revision), which was sanctioned by the Court in November 2013 ("First Scheme").  Pursuant to the terms of this scheme, the assets of the companies were pooled and procedures were put in place for quantifying claims.  

The JOLs were appointed as scheme supervisors and charged with administering the terms of the First Scheme.  Substantially all of the claims against the SPhinX Companies have now been quantified and investors have been paid out a first distribution under the First Scheme. 

The relationship between the JOLs and stakeholders had unfortunately soured over the years – to the point where a stakeholders meeting concluded by an overwhelming majority that confidence in the JOLs had been lost.  The JOLs refused to step aside and three key stakeholders ("the Removal Applicants") filed an application with the Court seeking to remove the JOLs and appoint new liquidators.      

Ultimately, a commercial deal was struck without the need for the Court to decide whether or not to remove the JOLs from office.  It was agreed that a further scheme ("Amendment Scheme") would be promoted that would have the effect of amending the First Scheme to provide for the following key points: 

(a)  Partners of KPMG would be appointed as scheme supervisors in place of the JOLs to administer the terms of the scheme ("New Scheme Supervisors").

(b)  The New Scheme Supervisors would have carriage of all litigation by and against the SPhinX Companies in lieu of the JOLs without the need for further sanction of the Court.

(c)  The New Scheme Supervisors would also be responsible for the majority of outstanding issues in the liquidation, including dealing with future distributions and the majority of the reserves that were being held by the JOLs.

(d)  A new scheme committee would be appointed which would effectively take over the role of the liquidation committee.

(e)  The Removal Applicants would obtain the dismissal of the Removal Application.

(f)  Once the Amendment Scheme became effective, the JOLs would remain in office with responsibility for the ultimate wind down and dissolution of the SPhinX Companies but with the New Scheme Supervisors effectively managing the liquidation process until that time.  

At the initial hearing, the Court considered four threshold jurisdictional questions:

1)  Whether the Removal Applicants rather than the JOLs had standing to apply to the Court to commence the scheme process.

2)  Whether or not the Amendment Scheme constituted a compromise or arrangement for the purposes of section 86 of the Companies Law.

3)  Whether the Court could sanction the Amendment Scheme in circumstances where the Amendment Scheme proposed to implement a process which departed from the procedures envisaged under the insolvency regime.  In particular, the Court wished to be satisfied that it had jurisdiction to sanction a scheme where the JOLs were effectively relinquishing or delegating substantially all of their fiduciary powers and responsibilities to the New Scheme Supervisors even though the JOLs were to remain in office.

4)  Whether the Court had jurisdiction to sanction the Amendment Scheme given the proposed disbanding of the liquidation committee. 

At a hearing on 2 May 2014, the Court granted liberty to the SPhinX Companies to convene the meetings of investors to vote on the Amendment Scheme.  The statutory majorities were obtained at these Court meetings (at which all stakeholders constituted one class, unlike the multiple classes necessary under the First Scheme given the then different stakeholder interests), and at the hearing of the Petition on 10 June 2014, the Court agreed to sanction the Amendment Scheme.  By way of a written ruling dated 23 July 2014, the Court set out its reasoning in relation to the four jurisdictional questions as follows:

1)  Did the Removal Applicants have standing?

Where a company is being wound up by the Court, section 86(1) of the Companies Law provides that an application to commence the scheme process by way of seeking liberty to convene the Court meetings can only be brought by the JOLs2.  However, in the circumstances of this case, although the Removal Applicants, rather than the JOLs, had made the application, the JOLs supported the Amendment Scheme and the scheme process.  Accordingly, the Court considered that the approval of the JOLs had properly enlivened the jurisdiction of the Court to convene the Court meetings and that accordingly the requirements of section 86(1) had been satisfied and the Removal Applicants could proceed with their application. 

2)  Was the Amendment Scheme a compromise or arrangement?

It was clear that the issue to be compromised was whether or not the JOLs should be removed or not.  In return for the investors agreeing that the Removal Application would be dismissed and the JOLs would remain in office, the JOLs would agree that certain of their fiduciary responsibilities would be ceded to the New Scheme Supervisors. 

Although this was an extremely unusual arrangement, for which there was no comparable precedent, the Courts have not historically sought to define or limit the terms "compromise or arrangement".  The Court was satisfied that the Amendment Scheme included the necessary element of "give and take" between the parties and therefore constituted a compromise or arrangement for the purpose of section 86 of the Companies Law.

3)  Could the Amendment Scheme properly divest the JOLs of their powers?

The Amendment Scheme would involve a significant departure from the statutory Cayman Islands liquidation regime because it would divest the JOLs of their statutory powers and duties and effectively repose them in the New Scheme Supervisors without requiring the New Scheme Supervisors to seek further directions or sanction from the Court prior to exercising those powers.  From a review of the authorities, it was clear that the Court did have jurisdiction to sanction a scheme of arrangement which ousted aspects of the statutory insolvency regime in circumstances where the scheme had been approved by those with the economic interest in the estate3, and as here, the JOLs themselves.  

Indeed the authorities recognised that where those having the economic interest in a liquidation sought to alter the statutory regime applicable on insolvency, the appropriate mechanism to do so, in the absence of unanimous consent, was by way of a scheme of arrangement4.

In respect of the New Scheme Supervisors taking over all litigation claims by and against the SPhinX Companies, where a company is in liquidation, it is well established that upon liquidation, the right to conduct litigation on a company's behalf vests in the liquidator.  However, even in an official liquidation, there is a long line of authority that establishes that the Court has jurisdiction to authorise any person having a proven interest in the liquidation estate to pursue a claim in the name of the company in liquidation in lieu of the liquidator5.  There was no departure from this principle here.  In the present case, it is proposed that the New Scheme Supervisors will act as the representatives of the SPhinX Companies (and ultimately their stakeholders) in conducting the litigation. 

The Court also noted that the transfer of powers to the New Scheme Supervisors in this manner under the Amendment Scheme should be distinguished from any unilateral transfer or delegation of powers by liquidators outside of a scheme of arrangement process.  The unilateral assignment of liquidators' powers in this manner is not envisaged by the insolvency regime and should not be permitted.

4)  Could the liquidation committee be disbanded?

Under the procedural rules governing liquidations in the Cayman Islands, the Court has a discretion to dispense with the requirement for a liquidation committee.  Accordingly, the proposal that the liquidation committee be disbanded under the Amendment Scheme, and replaced by the Scheme Committee caused no jurisdictional difficulties.  

The New Scheme Supervisors have now been appointed and are carrying out their functions under the Amendment Scheme.  This decision shows the willingness of the Cayman Islands Court to permit the creative use of schemes of arrangement in order to secure the commercial objectives of stakeholders and showcases the flexibility of the scheme procedure itself.


In the matter of the SPhinX Group of Companies (in official liquidation), Grand Court unrep., 23 July 2014

This can be contrasted to the position where a company is not in liquidation, where it is expressly stated that any creditor or member can bring the application with the support of the company.

Anglo-American Insurance Co [2001] 1 BCLC 755, BCCI SA (No. 3) [1993] BCLC 1490 and Kempe v Ambassador Insurance Co. (in liquidation) [1998] 1 BCLC 234

Re Trix [1970] 1 WLR 1421

5 Starting with Bank of Gibraltar and Malta (1865) LR 1 Ch App 69 and recently reconfirmed in Fargro v Godfroy [1986] 1 WLR 1134


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