From Maples

Introduction

A recent filing for personal bankruptcy by two Cayman Islands residents, the primary purpose of which was to enable the trustee in bankruptcy to apply for chapter 15 relief in the United States, has raised some interesting cross border issues1. Personal bankruptcy proceedings are extremely rare in the Cayman Islands and this decision is one of the first times the Grand Court has considered the grounds upon which debtors can petition for their own bankruptcy under the Bankruptcy Law (Cap. 7) (1997 Revision).

Background and Proceedings

Mr and Mrs Millard were Cayman Islands residents whose primary assets consisted of shares in wholly owned Cayman Islands incorporated investment holding companies. Those companies in turn owned real property in a number of jurisdictions, including the Cayman Islands and Florida. The Millards’ principal debt comprised of debts owing to the Government of the North Marianas Islands (the “Marianas”) in respect of unpaid taxes. The Marianas had obtained default judgments against the Millards in the Marianas but had taken no steps to enforce the judgments for 17 years. With accrued interest, the total amount owing by the Millards was US$59 million.

The Millards had not become aware of the default judgments until 2011 when enforcement proceedings were commenced against them by the Marianas in the United States. The Millards commenced proceedings to have the default judgments set aside, however, a Florida court ruled that the issue should instead be determined in the Marianas courts.

As a result, the Millards filed for bankruptcy in the Cayman Islands so that a trustee in bankruptcy could be appointed, who would be treated as a foreign representative for the purpose of applying for Chapter 15 relief in the United States, together with a stay on the enforcement proceedings pending determination of the validity of the default judgment in the Marianas.

The Millards claimed they were entitled to a bankruptcy order because as a result of the default judgments, their worldwide assets were less than the amount of their total liabilities by a substantial margin.

Counsel for the Marianas objected to the petitions on three grounds:

(a)       The Millards did not have standing to petition for their own bankruptcy because foreign judgments in respect of taxes or penalties, such as the default judgments held by the Marianas, are unenforceable in the Cayman Islands2 and therefore, on this narrow (rather than worldwide) test of insolvency, the Millards were not insolvent because their assets in the Cayman Islands exceeded their enforceable liabilities here.

(b)      That bringing the petitions solely for the purposes of enabling the trustee in bankruptcy to apply for Chapter 15 relief was an improper purpose and therefore an abuse of the court’s process.

(c)       Finally, an order for bankruptcy would serve no useful domestic purpose in the circumstances, because the companies owned by the Millards were already in liquidation and, because the Marianas’ debt would be unenforceable in the bankruptcy, the role of the trustee in bankruptcy would simply be to collect the dividends from the liquidators and pay a 100% dividend to any other unsecured creditors in the Cayman Islands.

Judgment

Jones J found that, notwithstanding the unenforceability of the Marianas’ debt, the Millards did have standing to petition for their own bankruptcy because, under the provisions of the Bankruptcy Law, a debtor is entitled to present a bankruptcy petition against himself without having to prove insolvency on the narrow basis advanced by counsel for the Marianas. Instead, under the terms of the legislation, a debtor must explain his financial position and then show cause as to why a bankruptcy order should be made. The question to be determined by the court would then be whether a sufficient reason had been established for its discretion to be exercised in favour of the bankruptcy orders.

Jones J took care to point out that foreign and domestic creditors are normally treated equally in the Cayman Islands and that it was the nature of the debt (i.e. that of a foreign tax authority) and not the jurisdiction of the creditor, which rendered the Marianas judgment unenforceable.

Jones J also rejected the second argument, finding that the intention to bring ancillary Chapter 15 proceedings to enable the enforcement proceedings to be stayed was a legitimate objective, on the assumption that the Millards were insolvent (on a worldwide, rather than Cayman Islands only, basis) and that there was an arguable basis for challenging the default judgments in the Marianas.

Jones J also found that it was not futile to make the bankruptcy orders because it served a useful purpose for the trustee in bankruptcy to have the ability to apply for Chapter 15 relief.

On this basis of these findings, Jones J agreed to the absolute orders for bankruptcy applied for.

Conclusion

This judgment demonstrates a creative use of the Cayman Islands bankruptcy procedure and is an example of the Cayman Islands insolvency processes being used in parallel with foreign proceedings.

July 2013 © MAPLES AND CALDER

This update is intended to provide only general information for the clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.

NOTES:

1 In re Millard (unreported, 3 June 2013, Cause No FSD 60 and 61 of 2013)

2 This is the principle established in Government of India v Taylor [1955] AC 491, a UK House of Lord’s decision where it was held the Government of India could not prove in the liquidation of an English company for a debt based on taxes due in India.