Picard v Primeo Fund

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: (Jones, J.)
• Judgment Date: 14 January 2013
• Date: 14 January 2013

PICARD and BERNARD L. MADOFF INVESTMENT SECURITIES LLC (in liquidation)

and

PRIMEO FUND (in liquidation)

(Jones, J.)

Grand Court, Financial Services Division

Bankruptcy and Insolvency-assistance to foreign court-domestic insolvency proceedings-court not to entertain transaction avoidance claim under Companies Law (2012 Revision), s.241(1)(e)-s.241(1) exhaustive list of ancillary powers and purposes for use-power to order turnover of property of estate following transaction avoidance not included in s.241(1)(e)

Bankruptcy and Insolvency-assistance to foreign court-domestic insolvency proceedings-may provide ancillary assistance under Companies Law (2012 Revision), s.241 if (a) foreign proceedings capable of recognition under common law principles, and (b) substantive law consistent with Cayman policy-objectives include just treatment of creditors, prevention of preferential or fraudulent dispositions and recognition of security interests

Companies-foreign companies-jurisdiction-court has jurisdiction under principle of modified universalism to provide active assistance in recognized foreign bankruptcy even though not itself entitled to order liquidation or company or able to enforce foreign in personam avoidance claim-assistance includes allowing foreign trustee to bring domestic insolvency proceedings, e.g. preference claim under Companies Law (2012 Revision), s.145-local insolvency proceedings are ‘traditional assistance’ not requiring sufficient proximity between foreign and domestic law

Held, dismissing the claim in part:

The scope of assistance available by statute

(1) The Companies Law (2012 Revision), s.241(1)(e) did not allow the court to entertain transaction avoidance claims. The sub-section provided an exclusive list which described both the powers and the purposes for which they could be used. Section 241(1)(e) referred to the turnover of the ‘property of the debtor,’ meaning property which the debtor held at the

commencement of the liquidation. The rights to pursue preference claims and make recoveries by avoiding transactions did not arise until after the company had entered liquidation and were therefore the property of the estate, rather than of the debtor. There was therefore no statutory power to grant an ancillary order for a preference claim (paras. 14–15; para. 20).

Whether an order under s.241 would be governed by foreign or domestic law

(2) Orders made under s.241(1) would be governed by Cayman law. Although such an order would be ancillary to the foreign liquidation, this was on the basis that the liquidation proceedings themselves took place outside the Cayman Islands and not that Cayman insolvency law would be ancillary (i.e. foreign) as well. Similarly, although the pre-liquidation issues referred to events governed by foreign law and to foreign property, this did not lead to the conclusion that the liquidation order could not be concerned with domestic law. Whilst this created a mix of the legal systems involved in the overall liquidation, this was the result at common law and, as s.241 was intended to codify and supplement the common law rather than abolish it, there was no indication that there was any intention to change this situation. Further, it was unlikely that the explicit reference to domestic law, in the definition of a ‘relevant person’ under s.241(2)(b), meant that the rest of s.241 was to be regarded as concerning foreign law, rather than simply being for the purpose of clarifying the meaning of a ‘relevant person.’ The purpose of the ancillary order would be to assist the foreign court to achieve an economic and expeditious administration of the estate in line with Cayman”s policy objectives and, as foreign laws varied significantly, requiring that they be applied would be inconsistent with this goal. Considerations of comity did not affect this, as they simply required that the two jurisdictions sought and grant assistance for commonly held objectives, even though their own laws might have dictated different results (paras. 21–27).

(3) Further, any US authority that a ‘turnover action’ under the Bankruptcy Code would be decided according to foreign law could not be persuasive authority for s.241(1)(e). The similarities between the US Bankruptcy Code and ss. 241–242 were the result of the legislature”s not wishing to enact provisions based on the UNCITRAL Model Law (whereby the competent courts to resolve insolvency were those of the country in which the company”s ‘main interests’ resided) or on the insolvency regime in the UK Insolvency Act 1986 (whereby the Governor in Cabinet would have been required to designate countries which could be assisted). Instead, the Cayman court had been given a discretion to provide assistance when (a) the foreign proceedings were capable of recognition, in line with the common law principle; and (b) the substantive law was consistent with Cayman policy objectives, including the just treatment of all creditors, the prevention of preferential or fraudulent dispositions and the recognition of security interests. There were no grounds for inferring that the Cayman legislature had intended s.241(1)(e)

to have the same technical meanings as s.304 of the Bankruptcy Code. Moreover, given that the US courts referred to the ‘property of the estate,’ rather than the ‘property of the debtor,’ making use of the authorities from those courts would be putting too strong a US emphasis on the use of the word ‘turnover’ in the sub-section (paras. 18–19).

The scope of assistance available at common law

(4) The principle of modified universalism would give the court a discretionary power to entertain a preference claim under domestic law. The test for assistance was whether the Cayman court recognized the foreign insolvency proceedings. If it did, it would be entitled to provide active assistance by making an order, despite the fact that it might not itself have had jurisdiction to order the liquidation of the company (e.g. because it was incorporated in a foreign jurisdiction). As the power to set aside antecedent transactions was central to the purposes of insolvency law, the principle of modified universalism meant that the plaintiff was entitled to bring a claim for avoidance under domestic law, notwithstanding that he could not enforce an in personam foreign avoidance claim in a domestic court. Further, it could not be said that allowing a domestic insolvency claim required a sufficient proximity between domestic and foreign insolvency law, as it was now accepted as a form of ‘traditional assistance.’ The plaintiff was therefore entitled to bring a claim for avoidance of the prior transactions as voidable preferences under the Companies Law (2012 Revision), s.145 (paras. 33–35; paras. 39–42).

(5) Allowing the plaintiff to bring an action did not conflict with the principle that a statutory power could not be used outside the provisions of the Law in question. This principle was intended to prevent the common law from being used to thwart a statutory purpose, but in this instance the court would simply be using the statutory provision for its intended purpose despite the fact that the provision dealt with domestic liquidations. Moreover, given that the Cayman court had recognized that the trustee had the authority to act and that B was in liquidation, albeit in New York, it could not be maintained that the court was applying s.145 where there was no insolvency. However, when deciding if it would provide assistance, the court would consider the same policy considerations as it did when applying s.242(1) (e.g. if the defendant would not be entitled to prove against B for money owed in a liquidation, the court would be entitled to refuse to provide assistance on the ground that the domestic or foreign regimes would produce different economic results) (paras. 41–42; para. 48).

Can the defendants set off the claim?

(6) The defendant was not entitled to any set-off, either under the Companies Law (2012 Revision), s.140 or through the rule in Cherry v. Boultbee. As a set-off in s.140 could not apply to a domestic liquidation where the payment was a voidable preference, and the claim under s.145 was being treated as a claim under domestic law, there was nothing to indicate that a s.140 set-off should be allowed. Further, the policy

justifications for preventing a set-off for a voidable preference claim (e.g. that recipients of preferential payments should not be entitled to gain an advantage at the expense of other creditors) applied regardless of whether the insolvency was taking place in the Islands. Moreover, this could not be avoided by applying the rule in Cherry v. Boultbee. Although the plaintiff would normally be required to pay what he owed into the defendant”s liquidation fund before he could obtain money owed out of it, this did not displace the principle that a recipient of a preferential payment should be put into the position in which it would have been had it not received such a payment (paras. 45–47).

Cases cited:

(1) African Farms Ltd., In re, [1906] T.S. 373, applied.

(2) Al Sabah v. Grupo Torras S.A., [2005] 2 A.C. 333; [2005] 2 W.L.R. 904; [2005] 1 All E.R. 871; [2005] BPIR 544, considered.

(3) Anglo Co-op. Socy., In re, ex p. PellyELR(1882), 21 Ch. D. 492, referred to.

(4) Cambridge Gas Transp. Corp. v. Navigator Holdings PLC (Creditors” Cttee.), 2005–06 MLR 297; [2007] 1 A.C. 508; [2006] 3 W.L.R. 689; [2006] 3 All E.R. 829; [2007] 2 BCLC 141; [2006] BCC 962; [2006] UKPC 26, followed.

(5) Cherry v. BoultbeeENR(1839), 4 My. & Cr. 442; 2 Keen 319; 41 E.R. 171; 9 L.J. Ch. 118, distinguished.

(6) Dyoll Ins. Co. Ltd., In re, 2004–05 CILR 412, referred to.

(7) Founding Partners Global Fund Ltd., Re, [2011] Bda LR 22, applied.

(8) HIH Casualty & Gen. Ins. Ltd., In re, McGrath v. Riddell, [2008] 1 W.L.R. 852; [2008] 3 All E.R. 869; [2012] 2 BCLC 655; [2008] BCC 349; [2008]...