From Conyers Dill & Pearman

Cayman Islands Grand Court January 2013

CROSS-BORDER INSOLVENCY LAW – JURISDICTION TO DETERMINE CLAW-BACK CLAIMS – FOREIGN TRUSTEE GRANTED RECOGNITION IN THE CAYMAN ISLANDS – ABILITY OF THE CAYMAN ISLANDS COURTS TO ASSIST IN AID OF FOREIGN BANKRUPTCY PROCEEDINGS

Irving H Picard (as Trustee for the Liquidation of the Business of Bernard L. Madoff Investment Securities LLC)  (In Securities Investor Protector Act Liquidation) and Bernard L. Madoff Investment Securities LL (In Securities Investor Protection Act Liquidation) v. Primeo Fund (In Official Liquidation), grand court of the cayman islands (financial services division) (cause No. fsd 275 of 2010), Jones, J., 14 January 2013

This case concerned the latest Cayman chapter of the Madoff litigation. Bernard L. Madoff Investment Securities LLC’s (“BLMIS”) only connection with the Cayman Islands is that several Cayman domiciled investment funds, including Primeo fund (“Primeo”), placed funds with it for investment. Primeo’s success was highly dependent on BLMIS’ investment performance, and as such the fund suspended the calculation of its net asset value and suspended subscriptions and redemptions the very day after the arrest of Bernard Madoff for fraud. Primeo entered voluntary winding up very shortly thereafter and joint official liquidators were appointed.

BLMIS was not registered as a foreign company in the Cayman Islands. It was not licensed to carry on investment business in the Cayman Islands, nor did it hold any property in the jurisdiction. There was no action in the Cayman Islands for a winding up of BLMIS. However, in 2010, the Cayman Islands courts made a declaration under section 241(1)(a) of the Cayman Islands Companies Law recognising the trustee as the only person entitled to act on behalf of BLMIS in this jurisdiction. Having gained recognition, the trustee brought an action to claw-back certain payments that were made to Primeo before the commencement of the foreign liquidation proceedings. The claw-back claims, based on the law of unlawful avoidance/preference, were brought with reliance upon certain provisions of U.S. bankruptcy legislation, as well as Cayman Islands legislation and Cayman Islands common law.

In the trial of a preliminary issue, the court was concerned primarily with the question of whether either the common law or the Companies Law gave the court jurisdiction to adjudicate the trustee’s claw-back claims (whether under the substantive laws of the Cayman Islands or U.S. bankruptcy laws). The trustee attempted to rely on paragraph (e) of section 241(1) of the Companies Law, which provides that an ancillary order may be made for the purposes of “ordering the turnover to a foreign representative of any property belonging to a debtor”. However, the court found that this paragraph did not constitute a statutory claw-back mechanism. The court noted the difference between the notion of the “property of the debtor” and the “property of the estate of the debtor,” the latter being those assets available for distribution to creditors in the context of

a winding up order. As the assets in question did not fall into this category (there being no winding up order) relief could not be found in this section of the Companies Law.

The court further held that, in the event that it was wrong and the trustee could avail himself of section 241 as a basis for his claim, such claim would still need to be made out under the substantive law of the Cayman Islands, and not under U.S. bankruptcy law. the court concluded that “this court’s common law jurisdiction to provide assistance in respect of foreign corporate insolvency proceedings (whatever its scope) depends on the application of domestic law. If the Legislature had intended this rule to be abolished by the enactment of Part XVii, it would have said so expressly”.

The analysis then turned to the trustee’s common law rights to seek the assistance of the Cayman Islands court. This required a careful review of the UK Supreme Court’s decision in Rubin v. Eurofinance [2012] UKsc 46 (“Rubin”) as well as its impact on the decision in Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 ac 508 (“Cambridge Gas”).  Cambridge Gas stood for the principle that at common law a domestic court has jurisdiction to assist a foreign officeholder in a liquidation by doing whatever it could have done in a domestic insolvency proceeding. In Rubin,

the UK Supreme Court concluded that Cambridge Gas had been wrongly decided; however, Jones J. noted that “they did not reject the underlying proposition that recognition at common law “carries with it the active assistance of the court”.  They only rejected the proposition that ‘active assistance’ extended to the enforcement of in personam judgments made in bankruptcy proceedings which would not otherwise be enforceable in accordance with the established conflict of laws rules  articulated in Dicey’s rule 43.” Jones J. therefore determined that it was open to the court to find that the scope of the assistance available at common law in this case includes the power to entertain a preference claim under Cayman Islands law.

The court concluded its analysis by considering whether the scope  of assistance at common law is dependent on the existence of jurisdiction to make a winding up order. Having reviewed the general principle of ‘modified universalism,’ Jones J. came to the conclusion, “not without some hesitation, that this court does have jurisdiction at common law to apply to avoidance provisions of Cayman Islands insolvency law in aid of the BLMIS liquidation whether  it would have had jurisdiction to make a winding up order”.

The decision is being appealed by both parties.

February

COMPANIES – SHAREHOLDING REDEMPTION – VALIDITY OF ASSIGNMENT OF REDEEMED SHAREHOLDING – CONSIDERATION OF REDEMPTION AS DEBT OR INTEREST IN SHARES

Origami Partners III, LP v (1) Pursuit Capital Partners (Cayman) Ltd (2)  Pursuit Capital Partners Master (Cayman) Ltd (3) Pursuit Investment Management LLC, grand court of the cayman islands (financial services division) (cause No. fsd 36 of 2011 (PcJ)), 5 February 2013

In this matter the court considered whether a redeemed shareholding was a debt or an interest in shares and determined the resulting entitlement of the redeemed shareholder’s assignee, origami (the “Plaintiff”). The defendants were a Cayman master fund, its Cayman feeder fund and their Delaware investment manager. monies (in the amount  of Us$4.3 million) held back from a redemption were being claimed by the Plaintiff, to whom the interest in the redemption had been assigned. the defendants argued that the monies held back were not due.  the court considered both the validity of the assignment to the Plaintiff and whether the Plaintiff had standing to bring proceedings as the shareholder’s assignee.

With respect to the validity of the assignment, the defendants argued that the right to receive a redemption payment is an interest in shares. in view of this they argued that the Plaintiff’s standing as an assignee meant that it was ineligible to hold the investment under the terms of the relevant articles and, it was incapable of taking an assignment of any interests in the shares without the consent of the fund’s directors (and no such consent was obtained). in a similar argument, it was suggested that there was a prerequisite before payment of the holdback that an audit must take place. such an audit request could only be made by current or former shareholders.

The Plaintiff asserted that once a shareholder has been redeemed that shareholder is due a debt and that debt can be assigned to someone else (even if that assignee was in a class of people that could not have been a shareholder under the terms of the company’s constitution or otherwise). As such, the Plaintiff asserted it was a creditor of each of the defendants and that the nature of what was assigned to it were not rights in shares, or a transfer of shares, but the right to a sum equivalent to the money held back, recoverable as a debt.

The court held that the redeemed shareholding was a debt and the Plaintiff was entitled to the full sum sought, together with inter- est. the court noted that the shareholding had been compulsorily redeemed, the shareholders removed from the register and a NAV calculation had settled the amount due. The monies which were not paid created a debt in that amount  (less any sums which could be deducted). a settlement document defined how the debt would be paid, and so the court held that unless the parties had incorporated matters relating to the company’s structure and investor eligibility into the settlement document, then such points were irrelevant.

CAYMAN ISLANDS court of appeal

February

APPEAL OF AN ORDER FOR WINDING UP ON THE BASIS

THAT THE COMPANY WAS UNABLE TO PAY ITS DEBTS – DEBT ALLEGED TO HAVE BEEN SATISFIED BY THE TRANSFER OF CERTAIN SHARES TO THE REDEEMING SHAREHOLDERS – IN- KIND DISTRIBUTION MUST BE FROM ASSETS OF THE FUND WHEN THE DEBT CRYSTALLISED – TRANSFER OF SHARES WITHOUT REAL UNDERLYING VALUE NOT SUFFICIENT TO DISCHARGE THE DEBTS IN ANY EVENT – APPEAL DISMISSED

FIA Leveraged Fund v. Firefighters’ Retirement System, New Orleans Firefighters Pension & Relief Fund, Municipal Employees Retirement System of Louisiana Cayman Islands court of appeal, cica appeal No. 6 of 2012, cause No. fsd

0013/2012, Chadwick J., President, 18 February 2013 the articles of association of fia Leveraged fund (the “fund”) permitted the holder of any class of participating shares the right to be redeemed on delivery of a redemption request. the fund was obliged to redeem at the value fixed on the redemption date.  Payment  could be made in cash  or in-kind. in response to a redemption request, the fund transferred to the redeeming investors certain shares in another entity which were not assets of the fund on the redemption date.  in fact, the company whose  shares were so transferred was not in existence at the relevant date.

The court of appeal held that the power to make an in-kind distribution does not extend to the distribution of an asset which did not exist at the time when the investor was entitled to be paid his redemption monies. Furthermore, there was no evidence that the directors of the fund ever applied their minds to the proper valuation of the shares in question. the valuation  applied  by the directors could not be accepted as a rational exercise of discretion, and while the directors did have broad discretion to value assets under the articles and offering documents, there remains an implicit requirement that such  a valuation  should be carried out rationally. The appeal was dismissed.

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