By Eliot Simpson From Law360,

The decision earlier this year of Justice Andrew Jones in the Financial Services Division of the Cayman Islands gave a broad interpretation of the assistance that may be available to a foreign insolvency representative at common law. This stands in rather stark contrast to the approach taken in the Commercial Court in the British Virgin Islands, where the common law basis for recognition may have little place in BVI law and where statutory assistance is available only to representatives from a limited number of jurisdictions, that include Hong Kong, as well as the United States.

In Irving H. Picard and Bernard L. Madoff Investment Securities LLC v. Primeo Fund (Jan. 14, 2013, unreported) Justice Jones ruled on a series of preliminary issues in an action brought by Picard asserting a number of avoidance claims.

Picard is the trustee of Bernard L. Madoff Investment Securities LLC (BLMIS), the investment company that was formerly run by the disgraced Bernie Madoff. In a short judgment dated Feb. 5, 2010 (2012 (1) CILR 231), Jones had granted Picard recognition under Section 241(1) of the Companies Law (2009 Revision) as the sole person having the right to act on behalf of BLMIS in the Cayman Islands.

Thereafter, Picard commenced the avoidance action (seeking to set aside payments made by BLMIS to Primeo Fund) claiming both under the Cayman Islands preference provision (section 145 of the Companies Law) and under U.S. insolvency law. The availability of these claims was considered (as preliminary issues) by Jones in his Jan. 14, 2013, judgment.

Section 241 of the law empowers the court to make orders ancillary to a foreign bankruptcy proceeding. These may be made for a number of purposes, including recognition, imposing a stay on proceedings or on the enforcement of judgments, allowing an examination or production of documents and ordering the turnover of any property belonging to a debtor. In his judgment, Jones stated that Section 241 (incorporated in the law in 2007) supplements and partially codifies the common law; it did not abolish the common law rules, which continue to exist alongside the new statutory provision.

Jones decided that Section 241 does not allow for assistance to be given by way of avoidance actions, even though the U.S. courts had given such assistance under section 304 of the U.S. Bankruptcy Code, on which Section 241 was based. In particular, while Section 304 allowed the U.S. court to assist in the turnover of any property of “the estate,” Section 241 instead referred to property “belonging to a debtor,” which Jones held to mean the same as property of the company (and did not include the right to bring avoidance actions under the insolvency regime).

Jones went on to decide that if Section 241 did allow the foreign trustee to bring avoidance claims (contrary to his decision on this point), the court could only apply Cayman Islands law to those claims. Claims under U.S. law could not therefore be brought in any event.

Having dealt with Section 241, Jones considered whether the assistance that could be provided at common law could extend to giving access to the Cayman avoidance provision. On this point he concluded: “I have come to the conclusion, not without some hesitation, that this Court does have jurisdiction at common law to apply the avoidance provisions of Cayman Islands insolvency law in aid of the BLMIS liquidation.”

There were three principal issues that appear to have caused his hesitation.

The first of these appears to have been the decision of the Supreme Court in Rubin v. Eurofinance SA [2012] UKSC 46. In its judgment, the Supreme Court overruled a decision of the Court of Appeal that a U.S. avoidance judgment could be enforced in England and held that the case of Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings PLC, [2007] 1 AC 508, had been wrongly decided by the Privy Council. Although Lord Collins referred to cases of common law assistance, he did not consider whether avoidance powers could be made available to a foreign representative. Jones decided that the scope of assistance available at common law includes the power to entertain a preference claim.

The second issue was whether this type of assistance depended on there being sufficient connection between the company and the jurisdiction; the sort of connection that would allow the company to apply to be wound up as a foreign company under Cayman law (found in Section 91 of the Companies Law). Jones decided that the scope of available assistance did not depend upon there being jurisdiction to make a winding up order.

The third issue was the principle that a court has no inherent jurisdiction to exercise a statutory power in circumstances not falling within the provisions of the statute in question. Jones referred to the case of Al Sabah v. Groupo Torras SA, [2005] 2 AC 333, where this principle was considered by the Privy Council. Jones interpreted the principle to mean that the common law could not bring into play a statutory provision to achieve a purpose which is different from the object of the statute. He concluded that bringing the preference claim provisions of Section 145 into play in respect of BLMIS did not depart from or thwart the statutory objective of the Companies Law.

In the British Virgin Islands, the status of common law recognition and assistance was decided quite differently by Justice Edward Bannister QC (Ag) in Irving H. Picard v. Bernard L. Madoff Investment Securities LLC (BVIHCV 0140 of 2010, judgment dated Nov. 12, 2012). In a recent decision (noted below) Bannister has reconsidered his decision and disapproved it to a limited extent.

In the Picard v. BLMIS case, Picard sought recognition by the BVI court, together with a power to require any person to deliver up to Picard property of BLMIS. Bannister refused to make the orders sought.

Central to his reasoning was the codification of the concepts of recognition and assistance in the BVI Insolvency Act 2003, so that “the common law concept of recognition has no place under the British Virgin Islands legislation.”

Unlike the Cayman Islands, BVI has enacted provisions based on the UNCITRAL model law on cross-border insolvency. Those provisions are found in Part XVIII of the Insolvency Act. However, Part XVIII has not been brought into force. Had it been brought into force, it would apply only to foreign insolvency proceedings conducted in a “designated” jurisdiction.

The Insolvency Act has additional cross-border provisions in Part XIX. These allow the court to provide assistance to a foreign representative, but do not provide for recognition. Part XIX has been brought into force but applies only to “relevant” jurisdictions (those that have been identified as such by the Financial Services Commission). Ten jurisdictions have been so identified. These include Hong Kong and the United States.

Section 466 of the Insolvency Act provides that once a jurisdiction is designated under Part XVIII it ceases to be a relevant jurisdiction under Part XIX. Bannister therefore found that the two parts are mutually exclusive and that the legislature must have intended that a representative from a relevant jurisdiction must be confined to the relief under Part XIX and that the common law concept of recognition could not survive in tandem with the statutory regime.

In a recent decision, Bannister has reconsidered his decision on an application by a Hong Kong bankruptcy trustees for recognition in BVI. He decided that the court can grant recognition at common law to proceedings in relevant jurisdictions (but not those that have not been identified as relevant). In this case, he recognized that moveable property had vested in the Hong Kong trustees and they were permitted to take steps to take possession of that property. He did not accept that a foreign representative, even once recognized, could have access to the statutory powers available to a BVI appointee, such as the voidable transaction provisions.

On the face of it therefore, a foreign representative from a jurisdiction that is not a relevant jurisdiction has no access to either recognition or assistance in BVI. However, this is a developing area and one BVI law firm has reported that it successfully obtained recognition of an appointee from a nonrelevant jurisdiction, although there has not (at the time of writing) been a judgment handed down in that case.

The safer course for such a foreign representative may be to commence a separate insolvency proceeding in BVI. Section 163 of the Insolvency Act, for example, allows the court to order the winding up of a foreign company where sufficient connection with BVI is shown or where the appointment of a liquidator will benefit the creditors.

—By Eliot Simpson, Appleby Global Group Services Ltd.

Eliot Simpson is a Hong Kong-based partner in the litigation and insolvency practice group at Appleby.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For more on this story go to:

http://www.law360.com/articles/464917/cayman-vs-bvi-assistance-in-cross-border-insolvencies

See also related story published in iNews Cayman on May 13 2013 “Bahamas: Cross-Border Insolvency In The Cayman Islands: Picard -V- Primeo” at: http://www.ieyenews.com/2013/05/bahamas-cross-border-insolvency-in-the-cayman-islands-picard-v-primeo/