From Harneys

The following case notes outline two significant recent developments in the Cayman Islands

Caribbean Islands Development Ltd. (in Official Liquidation) v First Caribbean International Bank (Cayman) Limited (unreported)

In a ruling handed down on 8 October 2014, the Cayman Islands Court sent a strong reminder to litigants of the importance of providing security for costs in a form appropriate for enforcement by a Cayman resident defendant and, in doing so, highlighted the dangers of proposing alternative solutions without the prior approval of the Court.

The plaintiff, a Cayman Islands company in court-ordered liquidation and acting through its joint official liquidators at Rawlinson & Hunter (the JOLs), had issued proceedings against a local bank alleging that it had failed to fulfill its duties to the plaintiff in selling a property on its behalf.

On 7 March 2014 the Court had ordered that the plaintiff provide security for the defendant’s costs of the litigation within 21 days, in the amount of US$100,000. Although the plaintiff had sufficient money in its bank account, the JOLs claimed they had been unable to post security by way of cash deposit since the liquidation estate had obligations in the form of unpaid accrued professional fees, aside from which tying up the amount in question would have left insufficient cash to run the liquidation. Since further funding would be needed in any event if the litigation were to go ahead, the JOLs also approached investors for assistance, but were unable to obtain the necessary financial backing. The date for compliance with the security order came and went.

On an application by the defendant, the Court proceeded to make an ‘unless order’, the terms of which stated that, unless the plaintiff complied within a further 90 days, its claim would be struck out and the action dismissed. The JOLs used the additional time to seek litigation funding and ‘after the event’ (ATE) insurance in the London market to enable them to proceed with the claim and, with only a day to spare before the deadline in the unless order, approached the defendant with a proposal of security in the form of a deed of indemnity from a respected London insurer, QBE Insurance (Europe) Limited. The proposal was rejected by the defendant, but only after the time for compliance with the unless order had expired. The defendant immediately issued a summons for dismissal of the action with costs.

In the event, the indemnity was in place two days after the deadline for compliance with the unless order, with the result that the JOLs made a retrospective application for a two-day extension of time so as to bring the plaintiff in line with the order. That application was rejected. The Court was dismissive of the proposed form of security, which it said was unsatisfactory because it would not allow the defendant to enforce against assets in the jurisdiction and because the wording of the proposed indemnity suggested that proper account had not been taken of costs orders already in the defendant’s favour when taking out the insurance. The Honourable Chief Justice was critical of the JOLs, finding that they ought to have sought directions from the Court as to their proposed course of action, since this involved a decision not to pay in the security when they had means to do so and continuing to act in breach of the orders.

Under Cayman Islands law, an official liquidator may seek the sanction or direction of the Court in relation to the exercise of any of his powers or obligations and, provided he is acting reasonably in doing so, his costs of such an application will generally be paid out of the assets of the liquidation estate. Whether to incur the costs of such an application will be a matter for the liquidator to weigh up, taking into account the significance of the issue under consideration. Assuming that the enforceability of the proposed security had been identified as a potential issue, that issue was sufficiently important, in light of the consequences of not complying with the unless order, to merit an application for directions. Nonetheless, it must be said that the Chief Justice’s ruling is surprisingly critical of the JOLs given the attempts that were made to preserve a claim thought to be of real value to the estate.

One reason for this appears to be the JOLs’ practice of failing to make a reserve for costs orders made in the defendant’s favour, while at the same time being said to provision for their own fees. The implication is not that the JOLs paid themselves prematurely out of the assets (it seems clear that they had not paid their own fees for some time) but that they had persevered with trying to fund litigation from third party sources when there was a risk that they would be unable to cover the costs of embarking on that litigation. The ruling is a reminder to official liquidators that there is no obligation to commence litigation if there are insufficient assets in the estate and that, on any view, funding should be put in place before issuing the claim and not at a stage when orders have already been made in favour of the defendant, which the assets in the estate may be insufficient to satisfy. In practice, of course, the JOLs had (in the end) proceeded on the basis of ATE insurance, which they presumably thought would be sufficient to cover any outstanding liabilities to the defendant, perhaps without anticipating the doubts that would be expressed by the defendant (and shared by the Court) over the validity and enforceability of such insurance.

The case highlights the difficulties encountered by liquidators seeking to maximize the value of a liquidation estate with limited resources, and balancing competing obligations to the Court, creditors and opponents to litigation. The judgment emphasizes the importance of identifying potential issues at an early stage and assessing whether such issues merit an application for Court sanction, particularly when there is otherwise a risk of non-compliance with an order of the Court.

In Re ICP Strategic Credit Income Fund Ltd. and In Re ICP Strategic Credit Income Master Fund Ltd.

Much has been written in recent months about the circumstances in which it is appropriate for court-appointed liquidators of a Cayman Islands company to seek Court sanction to issue proceedings in the name of the company, and whether and in what form they should seek funding in order to do so [1]. In this judgment of 4 April 2014, which reflects a decision made in October 2013, Jones J sets out to clarify the circumstances in which the Court will sanction proposed litigation overseas funded by alternative funding agreements.

Background

The joint official liquidators of the ICP funds sought the Cayman Court’s leave to bring proceedings in the US against a well-known bank and an equally well-known international law firm. It was proposed that the proceedings be funded pursuant to the terms of a contingency fee agreement to be entered into with US attorneys, Reid Collins & Tsai LLP.

The issues raised by the application may not have been novel, but they were sufficiently topical and unclear as a matter of Cayman Islands law [2] that the parties requested the Court to provide its reasons in writing so as to help practitioners to understand the current attitude of the Court in circumstances where different approaches to funding options mean more options for liquidators in terms of where to litigate.

The liquidators needed Court sanction to proceed at all with the litigation. For its part, the Court therefore needed to be satisfied that pursuing the claim was in the best interests of those with a financial interest in the liquidation. For this to be the case, not only would the Court insist on there being a “real prospect of success” but it must also be satisfied that no other circumstances existed which could amount to an unreasonable risk of prejudice to the creditors or contributories of the company. As Jones J remarks in his ruling:

“There may be circumstances in which the downside risks of litigation would fall upon the creditors, whereas the upside benefit would go, in part, to shareholders who bear no corresponding risk. It follows that the Court’s decision to sanction the commencement of litigation can never be entirely divorced from questions about how and by whom it will be financed”.

Public policy

Historically, Cayman Islands law, like English law, has regarded certain litigation funding agreements as unlawful on grounds of maintenance (the interference in litigation of a disinterested party) or champerty (maintenance in return for a share in the proceeds). This public policy position is rooted in the unwillingness to promote the inherent conflict of interest that arises where an attorney is remunerated as a percentage of the proceeds of litigation rather than on a time spent basis.

Attitudes to maintenance and champerty have developed over the years in light of the competing focus on access to justice and freedom to decide for oneself whether to engage lawyers on a ‘no win no fee’ basis. Appropriately, however, the policy considerations that apply in the context of official liquidations continue to incorporate safeguards to ensure that investors and creditors are protected as far as possible from the potential risks associated with litigation funding agreements while still allowing liquidators the option of using outside funding.

The position in the Cayman Islands can be summarised as follows, as explained by the learned Judge in his ruling:

1. An assignment of a cause of action belonging to the company in return for a percentage of the proceeds of the action is a valid exercise by the official liquidator of his statutory power to sell the company’s property.
2. An assignment of a percentage of the proceeds of such a cause of action pursuant to a litigation funding agreement is also a valid exercise of the official liquidator’s statutory power to sell the company’s property, provided that the funder is given no right to control or interfere with the conduct of the litigation.
3. A purported assignment of a right of action or of the proceeds of a right of action vested in the official liquidator personally, such as a preference claim, is not authorized under the statutory power to sell the company’s property as this would amount to an unlawful surrender by the liquidator of his fiduciary power.

In determining whether, for the purposes of category 2 above, a litigation funding agreement falls foul of the requirements imposed by the law, the Court will always consider carefully the terms of the relevant agreement when it is asked to sanction the liquidator’s decision to proceed to issue proceedings.

Litigation funding agreements

To this end, the Cayman Islands has maintains a distinction between the following types of agreement:

1. “Limited recourse loan agreements”, whereby the funder (who may or may not be a stakeholder in the liquidation) provides purely financial assistance and agrees to receive a share of any proceeds recovered from the litigation.
2. “Contingency fee agreements”, whereby the funder is a foreign law firm, and the law firm assumes the conduct of the litigation in return for a share (usually expressed as a percentage) of the proceeds of the claim if, and only if, the litigation is successful.
3. “Conditional fee agreements”, whereby the funder is any law firm, and the law firm is paid on the basis of discounted hourly rates in any event, with an entitlement to an increase in fees in the event that the litigation is successful.

Limited recourse loan agreements and conditional fee agreements are considered valid in the Cayman Islands [3].

Contingency fee agreements of the kind described at ‘b’ above are void insofar as they relate to litigation that is to be carried out in the Cayman Islands. However, notwithstanding a requirement under the Companies Winding Up Rules that Cayman Islands law must govern the engagement of foreign attorneys by a Cayman Islands liquidator, Jones J held that the same restriction would not apply to litigation that was intended to be conducted in a jurisdiction (such as the US) where such agreements were permitted as a matter of law. In sanctioning the decision to bring proceedings in the US on a contingency fee basis, he did however insist that the agreement make it clear that the attorneys in question had no control over the outcome of the litigation.

Conclusion

The reasoning adopted by Jones J for his decision is that Cayman Islands law does not consider the relevant public policy to be a universal policy, rather one that applies only to litigation in domestic courts. In this and the remainder of his ruling, there appears to be some indication that this is an area of law that deserves to be amended by statute when it falls to be considered by the Cayman Islands Law Reform Commission.

The fact that the Court’s approach to sanction of liquidators’ powers has become stricter in recent years does seem to suggest that there may be room to develop the law in this area to allow more of a case-by-case approach in which each agreement and its possible prejudice to stakeholders can be assessed individually. In the meantime, Cayman Islands insolvency practitioners will continue to consider litigating overseas if they believe a contingency fee agreement to be in the best interests of their stakeholders.

[1] See also our note (above) on Caribbean Islands Development v First Caribbean International Bank.

[2] Indeed the law on maintenance and champerty is a topic that has been submitted for consideration by the Cayman Islands Law Reform Commission.

[3] See the unreported case of DD Growth Premium II x Fund and, before that, Quayum v Hexagon Trust Company (Cayman Islands) Limited [2002] CILR 161

SOURCE: http://m.harneys.com/publications/legal-updates/cayman-islands-case-notes-october-2014

IMAGE: queencitylaw.co.nz