By Charlotte Ducker & Geraldine Elliott From International Law Office

Introduction

The High Court has granted three insolvent Cayman companies (each in liquidation) a worldwide freezing order in support of proceedings against Mr Terrill, an individual who operated behind the companies’ respective corporate directors as their sole director and shareholder.(1) The court exercised its discretion to grant the injunction despite there being a delay of more than a year between the discovery of suspicious transactions linked to Terrill and a letter of request applying for a freezing order being sent by the Cayman court together with the companies’ liquidators to the English court. While delay generally would defeat this type of equitable relief, the court held that there were good reasons for the delay and that in the circumstances of this case, the delay did not provide grounds for withholding relief. The court was also not dissuaded from granting the injunction by the fact that the applicant companies were insolvent (and the resulting weakness of their cross-undertakings in damages). In this connection, the court observed that Terrill was at least partly responsible for the insolvency.

Facts

Centaur Litigation SPC (CLS), Centaur Litigation Limited (CLL) and Centaur Litigation Unit Series 1 Limited were Cayman companies which carried on business as mutual funds engaged in the funding of litigation. Between them, the companies raised around £80 million from some 1,300 individual retail investors.

In 2014 Mr Selinger became involved in the restructuring of the companies and found their accounts in disarray. In particular, Selinger discovered the following three suspicious transactions entered into by the companies:

On September 5 2012 CLL entered into an agreement with Argentum Investment Management Limited (AIM) for the provision of a £6 million revolving credit facility to be made available by CLL to AIM. All of the funds were drawn down, but were paid to an associated company, Argentum Administration Limited, instead of AIM. None of the money, nor any interest, had been repaid to CLL. On July 10 2013 Terrill signed for and on behalf of CLL to “waive” AIM’s repayment of the credit facility. This waiver formed part of the consideration for a share transaction to which CLL was not a party, and there was no other commercial reason why CLL should forego £6 million plus interest.
On July 10 2013, Buttonwood Statutory Limited, a company owned by Terrill, entered into a share purchase agreement with Mr McGaw. The agreement related to a proposed sale of shares in AIM for £5 million in cash. The agreement was unsupported by a valuation and the purchase price was not paid by Buttonwood, the buyer, but by the companies instead.
Buttonwood entered an agreement on August 22 2013, this time with CLS, which agreed to buy shares in another company in which Terrill had an interest, Buttonwood Legal Capital Limited. The purchase price of £1.2 million was transferred from CLS to Buttonwood Legal, before being transferred directly to Terrill.

Selinger asked Terrill for an explanation of these transactions and the companies’ businesses generally. Terrill tendered a statutory declaration, but the answers were found to be lacking, and on June 20 2014 legal proceedings were commenced against Terrill in the British Virgin Islands.

On June 27 2014 Selinger appointed provisional liquidators over the companies, which were subsequently appointed joint official liquidators by the Grand Court of the Cayman Islands. The liquidators formed the view that Terrill had breached his duties as an officer of the companies and had misappropriated the companies’ funds.

The liquidators were initially unable to pursue investigations against Terrill because he failed to answer emails and his physical whereabouts was unknown. However, on August 14 2015 Terrill was arrested in England in connection with an unrelated crime. The liquidators were informed and, together with the Cayman court, sent a letter of request to the English court seeking a worldwide freezing order in the sum of £13.25 million against Terrill.

Decision

The High Court decided to assist the Cayman court and its joint official liquidators pursuant to Section 426 of the Insolvency Act 1986, recognising that the liquidators represented the companies and therefore could seek the relief.

The court granted the worldwide freezing order. First, the court held that there was a good arguable case that Terrill was a de facto director of the companies and had breached his duties as such. Terrill was found to be part of the corporate governing structure of the companies, and held himself out as a director of the companies.

Second, the court held that there were assets on which the injunction could bite, such as bank accounts, a houseboat and several classic cars within the jurisdiction, and further bank accounts in other jurisdictions.

The court found that the ends of justice were likely to be defeated if the injunction was not granted and, while allegations of dishonesty were not of themselves sufficient to warrant the grant of freezing relief,(2) there was a connection between properly founded allegations of dishonesty and the grant of the relief sought.(3) The judge found that Terrill had indicated a willingness to conceal transactions beneficial to himself and that he would be prepared to evade the enforcement of any judgment against him.

While Selinger had identified the relevant transactions in June 2014, the court held that the delay of over a year did not defeat the equitable injunction. The judge found that the delay could be justified because Terrill’s whereabouts were unknown until he was identified in England, and the joint official liquidators were obliged to seek legal advice, the permission of the creditors’ committees and the assistance of the Cayman court before writing to the English court for assistance.

Finally, the judge dealt with the question of the strength of the companies’ cross-undertaking in damages in light of their insolvency. Ordinarily with such applications, the applicant must satisfy the court of its ability to provide a cross-undertaking in damages in order to compensate the respondent in the event that it later transpires that the relief ought not to have been granted. On this issue, the judge held that the companies’ insolvency was, in a large part, a consequence of Terrill’s activities and so was not dissuaded from granting an injunction by the fact that (despite providing the requisite cross-undertakings in damages) the companies might not be able to compensate Terrill in the event of the injunction being wrongly awarded.

Comment

The High Court’s decision in this case demonstrates the extent of the court’s discretion in the provision of injunctive relief. While a delay of over a year would be fatal in many freezing order applications, this case serves as a reminder that the courts may still award the remedy if the delay was unavoidable and the relief sought is considered to be in the interest of justice. Further, the court would not allow the insolvency of the applicants (and the corresponding risk to the respondent if the freezing order is wrongly made) to stand in the way of making the order in circumstances where the respondent is in part responsible for that insolvency. However, the threshold for a freezing order remains high and applications should be made promptly and with provision for the necessary undertaking for damages in order to have the best chance of success.

While the judgment does not set out at length the court’s assessment of the merits of the underlying claims against the respondent, the perceived culpability of the respondent and nature of the individual retail investors who suffered loss as a result of the transactions in question are likely to have galvanised this robust approach from the court. It may be expected that less leeway be afforded to applicants in relation to disputes between commercial entities.

For further information on this topic please contact Charlotte Ducker or Geraldine Elliott at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) Centaur Litigation SPC (in liquidation) v Terrill [2015] EWHC 3420 (Ch).

(2) Thane v Tomlinson [2003] EWCA Civ 1272.

(3) As per Jarvis Field Press v Chelton [2003] EWHC 2674 (Civ).

For more on this story go to: http://www.internationallawoffice.com/Newsletters/Litigation/United-Kingdom/RPC/High-Court-issues-worldwide-freezing-order

Related story:

Centaur Litigation funds ‘misappropriated’, backed failed lawsuits – report

By Benjamin Robertson South China Morning Post PUBLISHED : Thursday, 18 September, 2014

Around £27 million (HK$340 million) of the £80 million raised by a litigation investment fund group was allegedly misappropriated, while much of the remainder has been lost backing failed lawsuits, an initial report by administrators reveals.

Centaur Litigation funds had not backed a single successful lawsuit and insurance policies and capital guarantee structures that investors were told would protect them in the event of a loss either did not exist or were for the most part issued by firms connected to the funds’ founders and former directors and show little likelihood of being honoured, according to a report by Grant Thornton, the funds’ court-appointed administrator.

A number of “irregular transactions” were identified where the “key beneficiaries of these transactions” were former directors or related parties, the report stated. Administrators were unsure how much money might be recoverable.

In one instance, the Cayman Islands-registered funds placed in trust £2.1m for a lawsuit that was later halted. £1.3m of the trust money went unspent but was then siphoned into an unrelated HSBC Hong Kong bank account rather than returned to the fund. The controlling entity behind the HSBC account is unclear, the report said.

A further £11m was used to buy a litigation investment firm controlled by one of the founders, despite the absence of any “sound basis or reasonable valuation assessment”, wrote Grant Thornton. An application to place the funds into administration was made to the islands’ high court in June.

Centaur raised about £80 million from August 2011 to December 2013 but according to administrators had no audited accounts and kept “poor financial records”, raising doubts over due diligence conducted by financial advisory firms that sold it.

The sale of Centaur funds is under investigation by the Securities and Futures Commission.

Until late 2012, firms linked to Business Class Group – a Hong Kong-based holding company – sold stakes in Centaur, even though the fund was not licensed for sale in the city.

Business Class Group’s chief executive is Mark Kirkham, a member of the general committee of the Confederation of Insurance Brokers, which regulates Hong Kong’s insurance industry.

In an earlier South China Morning Post story Kirkham denied that any of his consultants sold Centaur funds. This was disputed by four investors who said they bought the fund through a division of Business Class Group called Lifestyle Brokers. Several former group consultants told the Post they either sold the fund or had attended training sessions on how to sell it. One consultant said the fund paid 8 per cent gross commission, an above-average rate in a market where many funds pay nothing.

According to Grant Thornton, Centaur paid an 11 per cent commission rate to a fund marketing company, which then split the money with financial advisers.

Grant Thornton declined to respond to a request for comment on the report.

IMAGE: The sale of Centaur funds is under investigation by the Securities and Futures Commission. Photo: K.Y. Cheng

For more on this story go to: http://www.scmp.com/business/money/markets-investing/article/1595379/centaur-litigation-funds-misappropriated-backed