Picard v Primeo Fund

• Jurisdiction: Cayman Islands
• Judge: (Chadwick, P., Mottley and Campbell, JJ.A.)
• Judgment Date: 16 April 2014
• Court: Court of Appeal (Cayman Islands)
• Date: 16 April 2014

Court of Appeal

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

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

and

PRIMEO FUND (in liquidation)

G. Moss, Q.C., S. Robins and J. Harris for Picard and Bernard L. Madoff Investment Securities LLC;

M. Crystal, Q.C., P. Hayden and N. Fox for Primeo Fund.

Cases cited:

(1) Adams v. Cape Indus. PLC, [1990] Ch. 433; [1990] 2 W.L.R. 657; [1991] 1 All E.R. 929; [1990] BCLC 479; [1990] BCC 786, referred to.

(2) Ayala Holdings Ltd. (No. 2), Re, [1996] 1 BCLC 467, referred to.

(3) 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, referred to.

(4) HSH Cayman, In re, 2010 (1) CILR 375, considered.

(5) Hilton v. GuyotUNK(1895), 16 S. Ct. 139; 159 U.S. 113, referred to.

(6) MC Bacon Ltd. (No. 2), In re, [1991] Ch. 127; [1990] 3 W.L.R. 646; [1990] BCLC 607; [1990] BCC 430, referred to.

(7) Maxwell Communication Corp. PLC, In re, Maxwell Communication Corp. PLC v. Barclays Bank PLC(1994), 170 B.R. 800; 25 Bankr. Ct. Dec. 1567, referred to.

(8) Metzeler, Re(1987), 78 B.R. 674, referred to.

(9) Oasis Merchandising Ltd., In re, [1998] Ch. 170; [1997] 2 W.L.R. 764; [1997] 1 All E.R. 1009; [1997] 1 BCLC 689; [1997] BCC 282, referred to.

(10) Pepper (Insp. of Taxes) v. Hart, [1993] A.C. 593; [1992] 3 W.L.R. 1032; [1993] 1 All E.R. 42; [1992] STC 898, referred to.

(11) Reserve Intl. Liquidity Fund Ltd. (In Liquidation), In re, Grand Ct., April 1st, 2010, unreported, referred to.

(12) Rubin v. Eurofinance SA, [2013] 1 A.C. 236; [2012] 3 W.L.R. 1019; [2013] 1 All E.R. 521; [2012] 2 BCLC 682; [2013] BCC 1; [2012] UKSC 46, referred to.

(13) Schibsby v. WestenholzELR(1870), L.R. 6 Q.B. 155, referred to.

Legislation construed:

Companies Law (2012 Revision), s.241. The relevant terms of this section are set out at para. 13.

s.242. The relevant terms of this section are set out at para. 13.

United States Code, Title 11 (Bankruptcy Code), s.304: The relevant terms of this section are set out at para. 37.

Bankruptcy and Insolvency-assistance to foreign court-domestic insolvency proceedings-court may make ancillary order under Companies Law (2012 Revision), s.241(1) for purposes in s.241(1)(a)–(e)-s.242 guides purposes but incapable of creating new purposes for exercise of power-no general power to make any order court thinks appropriate

Bankruptcy and Insolvency-assistance to foreign court-domestic insolvency proceedings-court may entertain transaction avoidance claim under Companies Law (2012 Revision), s.241(e)-order for turnover of debtor”s property guided by desire under s.242(1)(c) to prevent fraudulent transfers, notwithstanding that avoidance claim property of estate-court to order third party to transfer property to debtor and subsequently order turnover of debtor”s property to foreign representative

The appellants brought an action in the Grand Court to avoid certain transactions performed before the appellant company (B) had gone into liquidation.

The respondent derived the majority of its investment income from B, a US company, and went into voluntary liquidation after it emerged that B has been operating as a large Ponzi scheme. B went into liquidation in New York and the first appellant (‘the appellant’) was appointed as its trustee in bankruptcy. The appellant, who had been recognized in the Cayman Islands as the trustee in the foreign bankruptcy (in proceedings reported at 2010 (1) CILR 231), brought proceedings to set aside transactions by which money from B was paid to the respondent, on the basis that, as the payments were made to prevent the discovery of Ponzi scheme, they could be set aside as made by B to defraud creditors. He submitted, inter alia, that the Companies Law (2012 Revision), ss. 241–242 entitled him to bring avoidance claims governed by US law.

The Grand Court (in proceedings reported at 2013 (1) CILR 164) held, inter alia, that the Companies Law (2012 Revision), s.241(1)(a)–(e) contained an exhaustive list of the powers available to the court when making an order ancillary to a foreign bankruptcy. There was therefore no general power under which it could make an order for transaction

avoidance. Section 241(1)(e) allowed the court to order turnover of any property ‘belonging to the debtor,’ but the court rejected the appellant”s submission that this should be interpreted in the same way as the US courts had interpreted the US Bankruptcy Code (on which ss. 241–242 were based). The court therefore followed the English jurisprudence and held that it should recognize the distinction between the ‘property of the debtor’ and the ‘property of the estate’-i.e. that the ‘property of the debtor’ was restricted to property which B had held at the commencement of the liquidation. Section 241 could not, therefore, include the ability to avoid preferential transactions. The court further held that, even if it were entitled to make an order under s.241, such an order would be governed by Cayman law. Although the liquidation estate, and its management, were governed by foreign insolvency law, the court was not entitled to apply foreign law in relation to transaction avoidance. The appellant appealed against both of these findings.

The appellant submitted that the Grand Court should have found that it had jurisdiction to make an ancillary order under ss. 241–242 as s.241(1)(a)–(e) did not contain an exhaustive list of powers, but rather a list of purposes for which the court could exercise the general power contained in s.241(1). Further, the Grand Court had erred in holding that s.241 should be interpreted in a fundamentally different way from the US Bankruptcy Code. This section had been introduced to the Legislative Assembly as being based upon ‘corresponding provisions . . . with which local practitioners are familiar’ and had used, without modification, a number of established technical terms from that Code. The legislature must, therefore, have intended that it be interpreted in the same way as the US Bankruptcy Code and be subject to the relevant US jurisprudence. As a result, the Grand Court should not have followed the UK authorities and should have found that there was no distinction between the phrases ‘property of the debtor’ and ‘property of the estate.’ Accordingly, s.241(1)(e) could be used to reconstitute the debtor”s estate through the avoidance of antecedent transactions. Moreover, s.242(1)(c)-which stated that the court should be guided by matters which assure an economic and expeditious administration of the estate consistent with the prevention of preferential or fraudulent dispositions of property comprised in the debtor”s estate-made it clear that s.241 must be capable of being used to avoid preferential transactions.

The respondent submitted in reply that the court did not have any jurisdiction to hear a preference claim under ss. 241–242. Section 241(1), unlike the US Bankruptcy Code, did not provide a power giving discretion for the court to grant any ‘other appropriate relief’ and s.241(1)(a)–(e) did not include a power to set aside transactions. There was therefore no basis to construe it as including a general power to make ancillary orders. Although s.241(1)(e) permitted the court to order turnover of property belonging to the debtor, it was well established in English law that this was distinct from the property of the estate-and that the proceeds of avoidance actions were property of the estate and not the debtor. If the

legislature had intended for a different meaning to apply, or for the court to be entitled to avoid transactions, it would have included an express provision to this effect. Further, whilst s.242(1)(c) referred to the prevention of preferential transactions, this did not extend to their reversal and could be satisfied by orders under s.241(1)(a) (recognition of the foreign representative) or s.241(1)(d) (ordering the production of documents relating to the business or affairs of the debtor to the foreign representative).

The appellant further submitted that the Grand Court should have found that, under ss. 241–242, it was entitled to apply US insolvency law. As the bankruptcy estate and its administration were entirely governed by foreign law and the court”s order was ancillary to the foreign bankruptcy proceedings, it would be illogical for the order to be made under domestic law. The appellant also submitted, inter alia, that the US Bankruptcy Code had been interpreted in such a way as to allow the courts to apply foreign insolvency law. As ss. 241–242 were based on that code, it must have been intended that the domestic courts adopt this interpretation.

The respondent submitted in reply that ss. 241–242 could not be used to apply foreign insolvency law. Such a power would have been a significant enough change that it would have been explicitly provided for had the legislature intended it to be available. Although the US Bankruptcy Code had been interpreted to allow the application of foreign law, the starting point for the interpretation of ss. 241–242 must be that Cayman law should apply.

Held, allowing the appeal in part:

(1) The court had jurisdiction under the Companies Law (2012 Revision), s.241(1)(e) to entertain transaction avoidance claims in a foreign bankruptcy. Section 241(1) conferred the power on the court to make ancillary orders, but (as there was no general power to make any order the court thought appropriate) such orders could only be made for the purposes stated in paras. (a)–(e). These purposes would be guided by s.242, although this section was not itself capable of creating purposes for which the power under s.241 could be exercised. There was nothing to suggest that the guidance in s.242(1)(c) was limited to the exercise of powers under s.241(1)(a) and...