Felderhof v Deloitte & Touche

• Jurisdiction: Cayman Islands
• Judge: (Chadwick, P., Mottley and Conteh, JJ.A.)
• Judgment Date: 12 July 2011
• Court: Court of Appeal (Cayman Islands)
• Date: 12 July 2011

Court of Appeal

(Chadwick, P., Mottley and Conteh, JJ.A.)

J. FELDERHOF, I. FELDERHOF, SPARTACUS CORPORATION and BANK OF BUTTERFIELD INTERNATIONAL (CAYMAN) LIMITED

and

DELOITTE & TOUCHE INCORPORATED

A. Lenczner, Q.C. and D. Dinner for the appellants;

M. Imrie and Ms. J. Clarkson for the respondent.

Cases cited:

(1) Ahmad Hamad Algosaibi & Bros. Co. v. Saad Invs. Co. Ltd., November 18th, 2009, unreported; further proceedings, 2011 (1) CILR 178, considered.

(2) Cardile v. Led Builders Pty. Ltd.UNK(1999), 198 C.L.R. 380; 162 ALR 294; [1999] HCA 18, followed.

(3) R. v. Felderhof(2007), 224 C.C.C. (3d) 97; [2007] O.J. No. 2974, considered.

(4) T.S.B. Private Bank Intl. S.A. v. Chabra, [1992] 1 W.L.R. 231; [1992] 2 All E.R. 245, followed.

(5) Telesystem Intl. Wireless Inc. v. CVC/Opportunity Equity Partners L.P., 2002 CILR N[22], considered.

(6) Walsh v. Deloitte & Touche Inc., [2002] 4 LRC 545; [2001] All E.R. (D.) 326; [2001] UKPC 58, followed.

Injunctions-Mareva injunction-court”s discretion to grant injunction-may grant Mareva injunction in aid of foreign proceedings if proceedings enforceable in Cayman, whether or not also justiciable in Cayman

Injunctions-Mareva injunction-court”s discretion to grant injunction-Chabra jurisdiction-may grant Mareva injunction against non-cause-of-action defendant holding assets for benefit of cause-of-action defendant or beneficially entitled to assets that may become available to satisfy judgment against cause-of-action defendant

The respondent brought proceedings in the Grand Court against the defendants to recover damages for breach of fiduciary duty and negligence.

The respondent, the trustee in bankruptcy of Bre-X Minerals Ltd. (‘Bre-X’), commenced proceedings against the defendants for damages in respect of Mr. Felderhof”s alleged breach of fiduciary duty and negligence. Mr. Felderhof had been responsible for supervising, exploring and

developing Bre-X”s mining opportunities in Indonesia, including its mining operations in the Busang region. Over several years Bre-X issued press releases confirming that gold had been found at its Busang properties and its share price rose significantly. However, concerns were raised about the nature and extent of its entitlement to the mineral deposits in the Busang properties, which were at risk of being lost, and about the accuracy of its drilling results. Bre-X retained Mr. Farquharson, the president of Strathcona Mineral Services Ltd., to perform a technical audit, which found that drilling samples had been ‘salted’ with the addition of gold particles. Upon discovery of the fraud, Bre-X”s stock price collapsed and the company entered bankruptcy. Mr. Felderhof had, prior to Bre-X”s decline, traded and transferred to his wife a large quantity of shares in Bre-X which they sold without filing insider trading reports.

The respondent commenced proceedings against the defendants in 1997 and obtained a worldwide freezing injunction in the Grand Court against three of the defendants. The respondent also commenced Canadian proceedings, including class actions and a derivative action. Criminal proceedings were also commenced against Mr. Felderhof under the Ontario Securities Act, in which he was charged with knowingly trading securities without disclosing material changes of circumstance or making misleading statements. In 2003, the parties agreed to stay the Cayman claims pending the outcome of Canadian proceedings, on the understanding that the Cayman claim would proceed only if necessary to ensure the enforcement or collection of moneys due. At that time, no party applied to discharge or vary the freezing injunction. Mr. Felderhof was subsequently acquitted in the Canadian criminal proceedings. In 2009, two of the defendants, Mrs. Felderhof and Spartacus Corp., made an application to the Grand Court to discharge the freezing injunction. The Grand Court (Henderson, J.) dismissed their application but gave them leave to apply again after one year to discharge the injunction for delay.

On appeal, the appellants submitted that (a) the freezing injunction should be discharged, as Mr. Felderhof”s acquittal of criminal charges by the Canadian courts and their rejection of Mr. Farquharson”s evidence meant that the respondent trustee in bankruptcy did not have a good arguable case against him for negligence or breach of fiduciary duty; (b) the injunction did not fall within the court”s Chabra jurisdiction, as Mrs. Felderhof”s assets were not held on behalf of her husband but belonged to her as a non-cause-of-action defendant and the Canadian claims were not justiciable in Cayman; (c) the injunction should be discharged for delay; and (d) the respondent should offer security in support of its undertaking in damages, equal to the appellant”s estimated costs of trial.

The respondent submitted in reply that (a) the acquittal of Mr. Felderhof on criminal charges, even if making the claim in negligence substantially harder to prove, did not preclude the court from finding that there was a good arguable case for breach of fiduciary duty from the other evidence available, including Mr. Felderhof”s extensive share trading; (b) the freezing injunction fell within the court”s Chabra jurisdiction, as such an

injunction could be ordered in respect of any assets belonging to a non-cause-of-action defendant which might become available to satisfy judgment against a cause-of-action defendant, whether or not held for the benefit of the cause-of-action defendant, and the Canadian claims were enforceable in Cayman; (c) the freezing injunction should not be discharged without proof of inappropriate action on their part and the court should not pre-empt the Grand Court”s leave to apply again after a year to discharge the injunction for delay; and (d) security should not be ordered as it had not previously been sought at any time since the injunction had been granted and there was no basis for the appellant”s calculation of the damages likely to be incurred if it transpired after trial that the injunction should not have been granted.

Held, dismissing the appeal:

(1) Mr. Felderhof”s acquittal on the criminal charges did not a preclude the Grand Court”s finding a good arguable case against him for breach of fiduciary duty. The rejection of Mr. Farquharson”s evidence by the Canadian court would cause the trustee substantial difficulty in establishing that Mr. Felderhof was negligent in failing to detect the ‘salting’ of core samples. However, the Grand Court had not erred in refusing to discharge the freezing injunction because other evidence from the fall of Bre-X”s stock, including the share trading by Mr. and Mrs. Felderhof and the statements made to the public about Bre-X”s interest in the Busang properties, established a good arguable case against Mr. Felderhof for breach of fiduciary duty in misrepresenting to the public the true nature of Bre-X”s interest in the Busang properties (paras. 24–48).

(2) Further, the freezing injunction against Mrs. Felderhof, as a non-cause-of-action defendant (‘NCAD’), had been within the Chabra jurisdiction of the court, under which a freezing injunction could be ordered where it would be ancillary or incidental to the effective enforcement of an award against a cause-of-action defendant (‘CAD’). A freezing injunction could therefore be ordered in respect of an NCAD holding assets for the benefit of a CAD, or against an NCAD beneficially entitled to any assets which may become available to satisfy judgment against the CAD. Such an injunction could also be granted in aid of foreign proceedings if those proceedings could be enforced in the Cayman Islands. The real question was enforceability and not whether the claim was justiciable in the Cayman Islands, although as the Canadian actions included claims for breach of fiduciary duty that were substantially the same as those in the Cayman proceedings the matter did not arise in the present case. Therefore, the Grand Court had not erred in refusing to discharge the freezing injunction (paras. 49–55).

(3) The Grand Court had properly concluded that the extraordinary delay in pursuing the Cayman action of 12 years since the freezing injunction was granted could not, primarily, be attributed to the fault of the trustee and, though causing concern, would not justify the immediate

discharge of the injunction. Further, the relevant delay was the six-year period between the consent order staying the Cayman proceedings in May 2003 and the application to discharge the injunction in June 2009. The appellants had had the opportunity to complain of delay in 2003 but had not done so, nor had they demonstrated inappropriate action on the part of the trustee. The Grand Court had correctly directed that Mrs. Felderhof could apply, after a further year, for an order setting aside the freezing injunction on the ground of delay, which the court would not pre-empt (paras. 57–65).

(4) The respondent was not required to offer security in support of its undertaking in damages, since it had not been requested at any time in the 12 years since the freezing injunction had been granted. It was also unclear why, if security were required, the estimated costs of trial should be taken as the appropriate amount to be secured or the measure of damages if, following trial, it were discovered that the Mareva injunction should not have been ordered (paras. 67–69).

1 CHADWICK, P.: This is an appeal from an order made on February 12th, 2010 by Henderson, J. in proceedings brought by Deloitte & Touche Inc., as trustee of the estate of Bre-X Minerals Ltd., a bankrupt, against John Felderhof, his former wife Ingrid Felderhof, Spartacus Corp., a company incorporated in the Cayman Islands, and Bank of Butterfield International (Cayman) Ltd.

2 The proceedings were commenced as long ago as December 1997. On December 18th, 1997, immediately before the issue of the...