From Mount Ozannes

The Court of Appeal (Chadwick, Mottley and Campbell JJA) delivered its judgment in the case of Picard (Trustee for the liquidation of Bernard L Madoff Investment Securities LLC) v Primeo Fund (in official liquidation) on 16 April 2014. Mourant Ozannes acts for Primeo Fund (Primeo).

This judgment clarifies the extent of the Court’s jurisdiction under sections 241 and 242 of the Companies Law to apply transaction avoidance provisions in aid of foreign insolvency proceedings.

The Court of Appeal held that sections 241 and 242 provide the Court with jurisdiction to apply transaction avoidance provisions of Cayman Islands law, but not foreign law, in aid of foreign insolvency proceedings.

Background

The case arises out of the infamous Madoff fraud.

In February 2010 the Court made an order under section 241(1)(a) of the Companies Law, recognizing the right of Irving Picard, the Trustee (the Trustee) for the liquidation of Bernard L Madoff Investment Securities LLC (BLMIS), to act in the Cayman Islands on behalf of BLMIS.

On 9 December 2010 the Trustee commenced a claim in the Cayman Court against Primeo, seeking to recover certain payments allegedly received by Primeo both directly and indirectly from BLMIS during the years before Mr Madoff’s arrest in 2008.

The Trustee’s claim against Primeo included both US law and Cayman Islands law transaction avoidance claims. A preliminary issue was formulated as to whether the Court had jurisdiction, either under sections 241 and 242 of the Companies Law, or at common law, to apply transaction avoidance provisions under either foreign (in this case, the United States) or Cayman Islands law in respect of such claims.

Sections 241 and 242 of the Companies Law

Sections 241 and 242 fall within Part XVII of the Companies Law, which deals with international cooperation.

Section 241 of the Law provides that upon the application of a foreign representative (such as a liquidator appointed over a company in its country of incorporation) the Court may make orders ancillary to that foreign bankruptcy proceeding, for a number of specified purposes which are set out at subsections (a) to (e). One of the purposes, set out at section 241(e), is ordering the turnover to a foreign representative of any property belonging to a debtor.

Section 242 provides a set of criteria to be considered by the Court when determining whether to make an order under section 241.

Grand Court’s decision

In January 2013, the Grand Court (Jones J) considered sections 241 and 242 of the Companies Law and determined that, on their true construction:

1. 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.
2. Section 241(e) does not constitute a power to make orders for the purposes of setting aside antecedent transactions and ordering the repayment of money to the debtor. The Judge found that the phrase property belonging to a debtor, relates only to property (such as money in a bank account) belonging to a company prior to the commencement of its liquidation. It did not therefore include property which is recoverable only by an officeholder pursuant to the transaction avoidance provisions of the applicable insolvency law. Such property would be property of the estate.

Accordingly, the Grand Court held that sections 241 and 242 did not provide it with jurisdiction to make any order applying transaction avoidance provisions under foreign or Cayman Islands law in respect of the Trustee’s claims.

The Trustee appealed against this ruling.

The Court of Appeal Judgment

Jurisdiction

The Court of Appeal reversed the first instance judgment in part. It agreed that section 241 does not confer a general power on the Court to make such orders ancillary to a foreign bankruptcy proceeding as it sees fit.

However, the Court of Appeal did not agree that section 241(1) contains an exhaustive list of the Court’s statutory powers. Instead, it ruled that there is one power, namely to make orders ancillary to a foreign bankruptcy proceeding, which may only be exercised for one or more of the purposes set out in subsections (a) to (e).

The Court of Appeal found that, in relation to section 241(e), the purpose of ordering the turnover to a foreign representative of any property belonging to a debtor could be achieved by making a transaction avoidance order.

The Court of Appeal concluded that the phrase property belonging to a debtor gave rise to no difficulty, because a transaction avoidance order would have the effect of restoring property to the debtor. That, in turn, would enable an order to be made for the turnover to the foreign representative.

The Court of Appeal concluded that the relevant transaction avoidance provisions are those under Cayman Islands law, not foreign law, because if the legislature had intended foreign law to be applied, it could have been expected to say so in clear terms.

The Court of Appeal has not yet handed down a ruling as to whether the Court has jurisdiction at common law to apply transaction avoidance provisions in aid of foreign insolvency proceedings.

Mourant Ozannes acts for Primeo Fund. Contacts:

Peter Hayden, Partner, Cayman Islands

+1 345 814 9108 [email protected]

Nicholas Fox, Managing Associate, Cayman Islands

+1 345 814 9268 [email protected]

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