Grand Court Law (2015 Revision) and in an Application of BDO Cayman Ltd Concerning Argyle Funds SPC Inc. (in Official Liquidation)

JurisdictionCayman Islands
JudgeRaj Parker
Judgment Date13 February 2018
CourtGrand Court (Cayman Islands)
Docket NumberCause No. FSD 163 of 2017 (RPJ)
Date13 February 2018
In the Matter of Grand Court Law (2015 Revision)
And in an Application of BDO Cayman Ltd Concerning Argyle Funds SPC Inc (In Official Liquidation)
Before:

The Hon. Justice Raj Parker

Cause No. FSD 163 of 2017 (RPJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Injunctions — anti-suit injunctions — injunction against foreign proceedings brought against auditors — jurisdiction to grant — proceedings brought in New York — whether court should grant anti-suit injunction in respect of New York proceedings — arbitration, exclusive jurisdiction, sole recourse and assignment clauses — approach to evidence — approach to construction and degree of probability to be applied to enforceability — Arbitration Law, 2012 section 7 (arbitration agreement enforceable in insolvency) and 8 (consumer arbitration agreement) — originating process — overriding objective — discretion to cure defect in procedure.

Appearances:

Mr. Graham Chapman QC instructed by Mr. Andrew Pullinger and Mr. Shaun Tracey of Campbells on behalf of BDO Cayman Ltd

Ms. Clare Stanley QC instructed by Mr. Ulrich Payne and Mr. Paul Murphy of Ogier on behalf of Argyle Funds SPC Inc (in Official Liquidation).

IN CHAMBERS
Introduction
1

BDO Cayman Ltd (“ BDO Cayman”) applies by ex parte Originating Summons on Notice for an anti-suit injunction against Argyle Funds SPC Inc. (In Official liquidation) (“ Argyle”).

2

It applies for an Order restraining Argyle from continuing proceedings in the Supreme Court of the State of New York, County of Nassau, (the “ New York Proceedings”) commenced against four entities: BDO Cayman, BDO USA LLP (“ BDO USA”), BDO Trinity Ltd d/b/a BDO Trinidad & Tobago (“ BDO Trinity”) and Schwartz & Co LLP (“ Schwartz”). I shall refer to the latter three entities as the “other entities” to distinguish them from BDO Cayman, although all four are defendants in the New York proceedings.

3

BDO Cayman relies upon arbitration and exclusive jurisdiction agreements contained in Engagement Letters between BDO Cayman and Argyle dated 3 May 2011, 1 February 2012, 22 July 2013 and 30 April 2015 (together the “Engagement Letters”).

4

It relies also upon “Sole Recourse” clauses contained in the Engagement Letters between BDO Cayman and Argyle dated 1 February 2012, 22 July 2013 and 30 April 2015.

5

Argyle is a mutual fund organised under the laws of the Cayman Islands. It is now insolvent. David Griffin and Andrew Morrison were appointed on 26 April 2016 as the Joint Voluntary Liquidators and on 31 May 2016 as the Joint Official Liquidators (“ JOLs”).

6

BDO Cayman is a limited company incorporated and existing under the laws of the Cayman Islands. It was the statutory auditor of Argyle for the audit years ending 31 December 2006 – 2014. BDO Trinity is a limited company incorporated and existing under the laws of Trinidad & Tobago. BDO Cayman engaged BDO Trinity to assist with the conduct of the audits. BDO USA is a limited liability partnership existing under the laws of Delaware. Schwartz is a limited liability partnership existing under the laws of New York. BDO Cayman, Trinity and USA are members of BDO International, a global network of public accounting, tax, consulting and business advisory firms. Schwartz is an independent accountancy firm and BDO alliance firm that is not a member of BDO International.

7

The New York proceedings were commenced by Argyle, acting by the JOLs on 21 June 2017. The Complaint makes serious allegations against all four of the defendants relating to the provision of services under the Engagement Letters.

8

In particular taking this further than what might be termed the usual ‘auditors negligence’ case: fraud, professional gross negligence and unjust enrichment are pleaded.

9

It is alleged that the defendants' conduct was, for example … wilful, purposeful, knowing, malicious and in extreme departure from the norms expected of auditors (see paragraph 234 of the Amended Complaint). Despite language in the Engagement Letters waiving the right to punitive damages, punitive and exemplary damages are claimed in the Amended Complaint.

10

The causes of action in the Amended Complaint (see paragraphs 221–254) include tort claims (fraudulent concealment, gross negligence, and professional negligence).

11

They are made against BDO Cayman and the other entities. Restitution is claimed against BDO Cayman and the other entities and breach of contract is claimed against BDO Cayman only. Damages of at least US$86 million are claimed on the basis that BDO Cayman and the other entities, through their alleged gross negligence and/or intentional and fraudulent misconduct, caused catastrophic loss to Argyle.

12

Argyle claims to be the victim of two frauds. One took place between 2010 and 2016 when its New York-based credit advisers, Donald Barrick and his corporate entities RMP and ECB (“ Barrick”), misappropriated funds for their own purposes. The fraud was discovered in 2016 after which judgments were obtained against Barrick. Apparently Barrick has no assets left against which to enforce the judgments obtained.

13

The New York State Supreme Court, Nassau County has assigned the New York proceedings to the Honourable Stephen A Bucaria, the same judge who oversaw the actions against Barrick, as well as the individual actions against Mr Barrick and his wife personally.

14

The second fraud took place between 2004 and 2012 when Argyle's Canadian credit advisers (“ NSF”) and a Mr. Ovenden also misused funds and made fraudulent misrepresentations. The fraud was not discovered until April 2012. Again legal process was followed against the perpetrators and claims submitted in insolvency and other proceedings.

15

The upshot of the attempts to recover in New York and Canada has been that to date no recoveries have been made: due apparently to a combination of persons making themselves judgment proof, creditor protection regimes and lack of funding. Apparently as a result of these frauds Argyle, and in turn its investors, have lost over US $71 million.

16

In summary the case against the auditors is that BDO Cayman's audit reports did not alert Argyle and its investors to the impairment of the NSF investments until after the fraud was discovered and did not alert Argyle to the Barrick fraud at all.

17

In relation to the Barrick fraud it is alleged that the audit reports offered positive endorsements of the value of the investments and that inexplicably a warning in a draft report as to doubtful recovery of some of the investments was removed in the final report, which gave a clean opinion. It is alleged that the fraudulent actions of the auditors were motivated in large part by the concern that issuing anything less than a clean opinion could result in the loss of substantial business from Argyle and other related entities, as well as the desire to collect significant fees — see paragraph 238 of the Amended Complaint.

18

BDO Cayman and the other entities deny all the allegations made against them. There are serious disputes of fact as to which entities were involved in the audits and in which respects.

19

On 18 May 2017 Mr Justice McMillan gave directions to the JOLs permitting them to bring proceedings against BDO Cayman and the other entities in New York which were then commenced on 21 June 2017. After BDO Cayman issued this application, the JOLs went back to Mr Justice McMillan on 3 November 2017 who gave further directions authorising the JOLs to defend it.

20

On 11 September 2017 pursuant to a stipulation agreed between the parties and approved by the New York Court, the New York proceedings were stayed pending the outcome of this application.

The Engagement Letters
21

The four engagement letters relevant to this application cover the audit years 2010–2013, pursuant to which BDO Cayman provided certain audit services as statutory auditor to Argyle for the years ending 31 December 2010–2013 respectively. They each contain law and jurisdiction clauses in the following material terms:

“Applicable Law

This Agreement shall be governed by and construed in accordance with the laws of the Cayman Islands.”

“Jurisdiction

The courts of the Cayman Islands shall have exclusive jurisdiction in relation to any claim or matter arising from this Agreement.”

22

They also each contain a clause headed “Dispute Resolution Procedure” in the following material terms:

“If any dispute, controversy, or claim arises out of, relates to, or results from the performance or breach of this Agreement, [excluding claims for non-monetary or equitable relief] (collectively, the “Dispute”) either party may, upon written notice to the other party, request non-binding mediation. A recipient party of such notice may waive its option to resolve such dispute by non-binding mediation by providing written notice to the party requesting mediation and then such parties hereto shall resolve such dispute by binding arbitration as described below…”

23

The carve out in relation to claims for non-monetary or equitable relief from the procedure appears only in the two later years in question, namely 2012 and 2013, and not in either of the 2010 or 2011 Engagement Letters. The dispute resolution procedure goes on to provide in material terms:

“Any Dispute not resolved first by mediation between the parties, (or if the mediation process is waived as provided herein) shall be decided by binding arbitration. The seat of the arbitration proceedings shall be the Cayman Islands, unless the parties agree in writing to a different seat, and governed by the prevailing Arbitration law.

………

The governing law of the arbitration shall be the law of the Cayman Islands and the substantive law of the Cayman Islands shall apply to all issues therein….”

24

The Engagement Letters for the 2011, 2012 and 2013 years (but not for 2010) also contained a sole...

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