Pelletier (A Debtor)

• Jurisdiction: Cayman Islands
• Judge: (Kawaley, J.)
• Judgment Date: 16 March 2020
• Court: Grand Court (Cayman Islands)
• Date: 16 March 2020

IN THE MATTER OF PELLETIER (a debtor)

(Kawaley, J.)

Grand Court, Financial Services Division (Cayman Islands)

Bankruptcy and Insolvency — bankruptcy notice — service — personal service of petition or bankruptcy notice on debtor within jurisdiction usual but not fundamental requirement

Bankruptcy and Insolvency — jurisdiction — “debtor” — debtor who has (a) access to holiday home in Islands owned by trust of which beneficiary; (b) permanent residence certificate; (c) assets in Islands, including personal effects and bank accounts; and (d) used Cayman address as residential address, has sufficient residential connection to Cayman Islands to be “debtor” under Bankruptcy Law, s.2

Held, ruling as follows:

(1) The complaint that s.28 of the Law was unconstitutional could be summarily dismissed. The section could only be held to be unconstitutional on its face if it was self-evident that any instance of proceeding on a petition or notice without prior service would materially interfere with or hinder the enjoyment of the fair hearing rights protected by s.7 of the Cayman Islands Constitution. Even giving the provisions of s.7(1) a broad and purposive reading, s.28 could not be construed in such a way. It was possible to envisage various circumstances in which no prejudice might flow to a debtor from not being served with a petition. For example, a creditor could present a petition and not serve it pending negotiations with the debtor; pursuit of a provisional bankruptcy; or consultations with other creditors. It was easy to envisage circumstances in which the application of s.28 (e.g. by a petitioner obtaining an order absolute without notice) would potentially contravene a debtor’s s.7(1) rights but that would not mean that s.28 was unconstitutional on its face. Section 28 could be construed, in conjunction with s.167, as providing that “formal” service was not essential provided that no substantial injustice occurred. Such a meaning would be consistent with s.7(1) and was a more straightforward construction. Even if this primary finding were wrong, the Law was a pre-2009 Cayman Islands Constitution Order “existing law.” If the court were required to find that s.28 of the Law contravened s.7(1) of the Constitution by conferring an automatic right to obtain a final bankruptcy order without serving the debtor, the court would, pursuant to s.5(1) of the Constitution Order, construe the section “with such modifications, adaptations, qualifications and exceptions as may be necessary to bring them into conformity with the Constitution” (paras. 21–24).

(2) The provisional bankruptcy regime was governed not simply by s.29 of the Law, which permitted a creditor to apply ex parte for interim relief,but also by ss. 30 and 31, which entitled a debtor to apply to discharge the ex parte order and conferred a generously broad discretion on the court to set aside an inequitable provisional order. The court summarily rejected the complaint that these provisions contravened the fair hearing protections guaranteed by s.7(1) of the Bill of Rights. The constitutional complaints raised by the debtor were not seriously arguable and there was no justification for affording his counsel an opportunity for further elaboration (paras. 25–27).

(3) Personal service of a petition or bankruptcy notice on a debtor within the jurisdiction was usual but it was not a fundamental requirement in the Cayman Islands bankruptcy context, any more than it was in the British insolvency context under the 2016 Insolvency Rules or previous provisions. First, s.28 of the Law expressly stated that service of the documents was not “necessary.” Secondly, s.167 of the Law provided that no proceedings under the Law would be invalidated by reason of any irregularity “unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court.” The debtor had not suggested that the means deployed to bring the provisional bankruptcy order and the petition to his attention had failed, let alone that failing to serve him personally in the Cayman Islands caused substantial injustice. Thus even if personal service was defective and substituted service was not justified, the court would still be bound to find that no invalidity flowed from any irregularities which occurred in all the circumstances of the case. The court rejected the submission that the Law and the Grand Court (Bankruptcy) Rules contravened fundamental legal policy principles of general application by failing to require that leave be obtained from the court for serving a petition abroad and/or by failing to provide a leave mechanism. The key question was not whether the Rules authorized service of a document abroad, but whether the Law, properly construed, either (a) prohibited service of originating process or other documents abroad and/or did not contemplate overseas service at all, or (b) expressly or by necessary implication required leave to be obtained before serving process or other documents abroad. The court had little difficulty in finding that the Law conferred jurisdiction over otherwise qualifying debtors who could only be personally served abroad. The court found that (a) substituted service was available and was granted under GCR O.65, r.4 in factual circumstances which did not give rise to the need for service abroad in any event; (b) the absence of any power to grant leave to serve out would not in any event invalidate service as the Law contemplated service abroad; and/or (c) if there were a gap in the Rules as regarded leave to serve out, and service out did occur, the English practice under the Insolvency Rules, which applied the CPR service regime relating to claim forms to bankruptcy petitions, would fill it. If the petitioner had been required to seek leave to serve out and had not been entitled to substituted service within the jurisdiction (as the court had primarily found), it would have been able to establish the standardrequirements of (a) a real prospect of successfully establishing that it was a creditor and that at least one act of bankruptcy had been committed; (b) a good arguable case that the claim qualified for permission; and (c) that the Cayman Islands was the appropriate forum (paras. 32–33; paras. 39–45).

(4) The relevant time period for determining whether the relevant residential connection to the Cayman Islands existed was May to September 2019. The critical question was whether the debtor had a sufficient residential connection for the purposes of s.2 of the Law by virtue of the fact that, inter alia, at the material time (a) he had access to a holiday home in the jurisdiction owned by a trust of which he was a beneficiary; (b) he had a permanent residence certificate; (c) he had assets in the jurisdiction, including personal effects and bank accounts; and (d) he used his Cayman address as his residential address. The court considered the evidence that the debtor had a place of residence in the requisite legal and factual sense to be compelling. It was not necessary to decide whether he was also ordinarily resident in the jurisdiction. The statutory definition of “debtor” was non-exhaustive and expressed in broad terms, consistent with the fact that the bankruptcy jurisdiction was designed to provide effective relief to creditors of any debtor who had assets within the Islands. The jurisdiction created by s.2 of the Law was clearly broader than domicile or ordinary residence because it encompassed “carrying on business in the Islands, personally or by means of an agent or manager.” It was analogous to s.91 of the Companies Law (2020 Revision) which conferred jurisdiction to wind up a foreign company which had property located in the Islands or carried on business in the Islands. The central commercial objects and purposes of bankruptcy law, reflected in part in the fact that it was an act of bankruptcy to leave the jurisdiction or remain abroad with a view to defeating creditors, was to provide a mechanism for administering the assets of bankrupts for the benefit of their creditors. The jurisdictional net of the Law was intentionally cast very wide. It made no sense to construe the residential requirements of s.2 of the Law in a way which facilitated evasion of the Law by debtors who, when being pursued by creditors, sought to minimize or sever their local jurisdictional ties (paras. 50–54).

(5) The act of bankruptcy of failing to respond to the bankruptcy notice under s.14(g), which had been “served on the debtor in the Islands in the prescribed manner,” could validly be relied upon by the petitioner. The Rules were silent as to how bankruptcy notices were to be served and the lacuna was filled by reference to comparable English procedural rules (s.18(2) of the Grand Court Law). The governing English rule of practice was the rule that was currently applicable to the service of statutory demands, which were similar to bankruptcy notices. There could be little doubt that the petitioner had complied with the applicable service rule in relation to the bankruptcy notice and had done “all that is reasonable to bring the [bankruptcy notice] to the debtor’s attention” (Insolvency Rules2016, r.10.2). The combined effect of s.14(g) of the Law (service must be effected in the Islands) and s.167 (irregularities would not invalidate any steps taken in the proceedings unless substantial injustice was caused), read with GCR O.65, r.4 and/or r.10.2 of the Insolvency Rules 2016, was that the debtor was unable to challenge the validity of service of the bankruptcy notice on him within the jurisdiction by the various forms of service approved by this court. No substantial injustice was caused by the irregularity which occurred. The court’s primary finding was that personal service was not required but, if it were, substituted service was permissible under...