Introduction

In the recent case of Irving H. Picard and Bernard L. Madoff Investment Securities LLC (In Securities Investor Protection Act Liquidation) v Primeo Fund (in Official Liquidation)1 the Cayman Islands Grand Court has handed down a ruling giving detailed analysis of the powers of officeholders, who have been appointed in foreign insolvency proceedings and recognised in the Cayman Islands, to pursue transaction avoidance claims in this jurisdiction.

The circumstances surrounding the decision, and the decision itself, serve to emphasise the differences in Cayman Islands insolvency procedure from the UNCITRAL regime adopted in many leading onshore jurisdictions, including the United States and the United Kingdom. The Picard decision is also noteworthy for the identification of lacunae in two sections of the Companies Law; and for its commentary on the well-known cases of Cambridge Gas and Rubin.

The decision

Mr Irving H. Picard (“Picard”), held (and continues to hold) the office of trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”). BLMIS was and is the subject of insolvency proceedings in New York.

Its former owner and controller Mr Bernard Madoff has admitted that he used BLMIS to operate a Ponzi scheme and it was accepted that at all relevant times BLMIS’s investor advisory business was being carried on fraudulently. BLMIS was incorporated in New York, and had as its principal place of business New York City.

Certain Cayman Islands investment funds including the Defendant (“Primeo”) placed funds with BLMIS for investment prior to the disclosure of BLMIS’s fraudulent practices, and this was BLMIS’s only connection to the Cayman Islands. Primeo invested in BLMIS both directly and indirectly through two further investment funds.

Significantly, the Judge commented that prima facie there were no grounds for BLMIS to be wound up in the Cayman Islands under section 91(d) of the Companies Law (2012 Revision) (the “Law”).

Although not explicit in the judgment, such commentary suggests a view that potential transaction avoidance claims, which arise in the Cayman Islands upon the entry of a company into insolvency proceedings overseas, do not constitute “property located in the Cayman Islands” for the purposes of section 91(d).

Picard successfully obtained a recognition order in the Cayman Islands pursuant to section 241(1)(a) of the Law.

He then brought avoidance claims against Primeo in respect of certain direct and indirect withdrawals made from Primeo’s account with BLMIS prior to the commencement of BLMIS’s liquidation in New York. The matters before the Court in the present proceedings related to various preliminary issues. In particular the Court was asked to determine whether Picard may assert avoidance claims in the Cayman Islands either under section 241 of the Law or at common law. If such claims may be brought, the supplemental question arose as to whether such claims may be based upon the application of substantive United States law, or in accordance with Cayman Islands law (i.e. section 145 of the Law or its predecessor, section 168 of the 2007 Revision of the Companies Law). The Judge noted that while both US law and Cayman law have at heart the same underlying policy objective of ensuring the fair and equal treatment of creditors, the provisions of the respective laws are materially different.

The Judge held that avoidance claims may only be pursued at common law, not under section 241. The provisions of section 241(1)(e) permitting the Court to make orders ancillary to a foreign bankruptcy proceeding for the purposes of ordering the turnover to a foreign representative of any property belonging to a debtor do not encompass transaction avoidance claims. Avoidance claims cannot be seen as “belonging to the debtor” (in this case, BLMIS) as they did not exist prior to the commencement of the United States insolvency proceedings. Instead they can only be seen as property of the bankruptcy estate, and such claims fall outside the ambit of section 241(1)(e).

The Judge went on to hold that even if the Court had the power to allow preference or avoidance claims under section 241, it would have no power to apply foreign (in this case United States) law. This is the position at common law and there is no suggestion that the provisions in the Law concerning international cooperation (including section 241) were intended to reverse that position.

Having determined that the relevant legal framework is to be found solely in the common law, the Judge proceeded to consider the recent case law in this area. Following the 2012 UK Supreme Court case of Rubin v Eurofinance2, which in turn heavily criticised the leading Privy Council case of Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc3, the role of foreign officeholders at common law has been a subject of much academic debate. The majority of the Supreme Court in Rubin held that Cambridge Gas had been wrongly decided. The decision, however, seemingly relates only to the relevant principles regarding the enforcement of foreign judgments obtained by foreign office holders which were at issue in Rubin. The Supreme Court did not expressly reject the underlying propositions encapsulated in Cambridge Gas relating to the common law processes at the disposal of the Court to assist with foreign insolvency proceedings.

In Picard, the Judge considered himself at liberty to apply the common law rules set out in Cambridge Gas, leading him to the conclusion that the Court may give “active assistance” to the foreign officeholder (Picard) who had been recognised in the Cayman Islands pursuant to section 241. The meaning of “active assistance” was however open to some debate. The Judge held that “active assistance” must include both “traditional assistance” (such as the vesting of assets in a foreign officeholder pursuant to recognition alone) and “non-traditional assistance” (a kind of assistance which involves conferring upon the foreign officeholder a cause of action under local insolvency law).

Accordingly the Court had discretion to entertain Picard’s proposed transaction avoidance claims pursuant to section 145 of the Law (or its predecessor section), and such power was not dependent upon the existence of jurisdiction under section 91(d) to wind up BLMIS in the Cayman Islands.

The final point determined by the Court related to set-off. The Judge held that Primeo had no rights to rely upon the insolvency set-off regime against the Plaintiffs in relation to certain non-proprietary claims allegedly held by Primeo. Had BLMIS been in liquidation in the Cayman Islands, Primeo would have had no rights to set off its claims against a preference claim asserted by BLMIS’s liquidator and the situation was no different simply because BLMIS was in insolvency proceedings overseas, given that Picard would be pursing his preference claims in accordance with Cayman Islands law.

Commentary

The findings in Picard provide helpful clarity with regard to this rapidly-evolving area of law. The provisions of the Law relating to the recognition of foreign officeholders were not adopted until 2007, supplementing and partially codifying the existing common law rules. Judicial analysis of these provisions is therefore to be welcomed. As the Judge explained, unlike jurisdictions such as the United States or the United Kingdom, the Cayman Islands have not sought to enact the relevant provisions of the UNCITRAL Model Law. Instead, the Cayman Islands legislature has borrowed from now-repealed sections of the United States Bankruptcy Code.

By definition it was clearly not intended for foreign officeholders to have the same powers in the Cayman Islands as they would have had if the UNCITRAL Model Law had been adopted.

One of the key differences between the two regimes is the discretion retained by the Court under Cayman Islands law. In the USA, for example, where applications for “main recognition” are made under Chapter 15 of the United States Bankruptcy Code, applicants must satisfy the Bankruptcy Court that the foreign insolvency proceedings have been issued in the company’s centre of main interest. Subject to public policy exceptions, a successful applicant is entitled as of right to be recognised and to benefit automatically from certain provisions of Chapter 15. Similarly if the requisite tests are satisfied, applications for “non-main recognition” must be granted, although the United States Courts do retain discretion in relation to the powers of foreign office holders with non-main recognition and, regardless of the type of recognition granted, avoidance claims will not automatically be countenanced.

In the Cayman Islands, applications for recognition are determined in the Court’s discretion, as are subsequent applications to exercise any of the powers contained in the Law or exercisable at common law. In Picard the plaintiff, who had been granted recognition by the exercise of the Court’s discretion, and has now established his right at common law for his claims to be “entertained” by the Court, must now seek a decision as to whether the Judge will exercise further discretion to allow those claims to be brought. In the same way, should he seek any other ancillary order under section 241, he would again require the Court to exercise its discretion in his favour.

The lacunae identified in the Law add a layer of complexity to establishing the assistance which foreign officeholders may expect from the Cayman Islands Court. As the Judge identified, neither section 241(1)(e) nor section 91(d) will be engaged by the existence of avoidance claims which, by their very nature, did not exist prior to the making a foreign bankruptcy order. Accordingly such claims cannot be used to draw a company into the Cayman Islands insolvency regime for the purposes of section 91(d); nor may they be pursued under section 241(1)(e) – notwithstanding that a cause of action to pursue a claim is normally regarded as an asset of the company in liquidation. The existence of these lacunae does not prevent the Court from entertaining such claims, but it does place them outside the ambit of the detailed provisions of the Law, where they must be pursued according to common law principles.

Perhaps the most eagerly-received passages of the Picard judgment are the Judge’s conclusions regarding Cambridge Gas and Rubin. Despite the Supreme Court’s criticism of Cambridge Gas, the Judge in Picard held that he remained bound by the general statements with regard to common law assistance made by the Privy Council in Cambridge Gas, in particular with regard to the Court giving “active assistance” to a foreign officeholder.