Re Bristol Fund

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 02 May 2008
• Court: Grand Court (Cayman Islands)
• Date: 02 May 2008

Grand Court

(Smellie, C.J.)

IN THE MATTER OF BRISTOL FUND LIMITED

IN THE MATTER OF BEACON HILL MASTER LIMITED

A. Jones, Q.C. and B. Mays for the applicant;

Miss L. Hatfield for the respondent.

Cases cited:

(1) Armitage v. Nurse, [1998] Ch. 241; [1997] 3 W.L.R. 1046; [1997] 2 All E.R. 705; [1997] Pens. L.R. 51; (1997), 74 P. & C.R. D13, referred to.

(2) Barings PLC v. Coopers & Lybrand (No. 7), [2003] Lloyd”s Rep. I.R. 566; [2003] P.N.L.R. 34; [2003] EWHC 1319 (Ch), referred to.

(3) Brazilian Rubber Plantations & Estates Ltd., In re, [1911] 1 Ch. 425; (1911), 80 L.J. Ch. 221; 103 L.T. 697; 27 T.L.R. 109, referred to.

(4) City Equitable Fire Ins. Co. Ltd., In re, [1925] Ch. 407; [1924] All E.R. Rep. 485; [1925] B. & C.R. 109; (1925), 94 L.J. Ch. 445; 133 L.T. 520; 40 T.L.R. 853, considered.

(5) Express Newspapers PLC v. News (U.K.) Ltd., [1990] 1 W.L.R. 1320; [1990] 3 All E.R. 376; [1991] F.S.R. 36, referred to.

(6) Fleming v. Wandsworth London B.C.UNK(1984), 83 L.G.R. 277; 11 A.L.J. 272, followed.

(7) Grundt v. Great Boulder Pty. Gold Mines Ltd.UNK(1937), 59 C.L.R. 641, dictum of Dixon J., referred to.

(8) Hardy v. Fothergill, [1886–90] All E.R. Rep. 597; (1888), 13 App. Cas. 351; 58 L.J.Q.B. 44; 59 L.T. 273; 4 T.L.R. 603, applied.

(9) Kingston Cotton Mill Co., Re, [1896] 1 Ch. 6; (1896), 65 L.J. Ch. 145; 73 L.T. 482; 12 T.L.R. 60, dictum of Williams J., followed.

(10) Lemos v. Coutts & Co. (Cayman) Ltd., 1992–93 CILR 460, referred to.

(11) Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548; [1991] 3 W.L.R. 10; [1992] 4 All E.R. 512, dictum of Lord Bridge, followed.

(12) London & General Bank, Re, [1895] 2 Ch. 166; [1895–99] All E.R. Rep. 948; (1895), 64 L.J. Ch. 866; 39 Sol. Jo. 450; 72 L.T. 611; 11 T.L.R. 374, considered.

(13) Mallett v. Restormel B.C., [1978] 2 All E.R. 1057; [1978] I.C.R. 725; (1978), 13 I.T.R. 246; 77 L.G.R. 1; 122 Sol. Jo. 178, dictum of Donaldson J., referred to.

(14) Midland Coal Coke & Iron Co., Re, [1895] 1 Ch. 267; (1895), 64 LJ Ch. 279; 39 Sol. Jo. 112; 71 L.T. 705; 11 T.L.R. 100, followed.

(15) Moorgate Mercantile Co. Ltd. v. Twitchings, [1976] Q.B. 225; [1975] 3 W.L.R. 286; [1975] 3 All E.R. 314; [1975] R.T.R. 528; (1975), 119 Sol. Jo. 559, dictum of Lord Denning, M.R., followed.

(16) Mutual Reins. Co. Ltd. v. Peat Marwick Mitchell & Co., [1997] 1 Lloyd”s Rep. 253; [1997] 1 BCLC 1; [1996] BCC 1010; [1997] P.N.L.R. 75, followed.

(17) Omni Secs. Ltd. v. Deloitte & Touche, 2000 CILR 102, referred to.

(18) R. v. Shacter, [1960] 2 Q.B. 252; [1960] 2 W.L.R. 258; [1960] 1 All E.R. 61; (1960), 44 Cr. App. R. 42, referred to.

(19) T & N Ltd., Re, [2006] 1 W.L.R. 1728; [2006] 3 All E.R. 697; [2006] 2 BCLC 374; [2006] B.P.I.R. 532; [2005] EWHC 2870 (Ch), applied.

(20) Transnational Ins. Co. Ltd., In re, 1998 CILR 114; on appeal, 2001 CILR 34, followed.

(21) Winter v. Inland Rev. Commrs., [1963] A.C. 235; [1961] 3 W.L.R. 1062; [1961] 3 All E.R. 855; [1961] T.R. 349; (1961), 40 A.T.C. 361; 105 Sol. Jo. 929, dictum of Lord Reid followed.

Legislation construed:

Companies Law (2004 Revision), s.161: The relevant terms of this section are set out at para. 54.

Insolvency Rules 1986 (S.I. 1986/1952), r.13.12: The relevant terms of this rule are set out at para. 58.

Companies-auditors-indemnity against liability-auditor may be treated as company ‘officer’ for purpose of relying on indemnity provided in company”s articles, if contractual indemnities unavailable to it-officers may not indemnify themselves against losses resulting from own conduct, but may rely on indemnity for losses attributable to conduct of other parts of management

Companies-auditors-indemnity against liability-if contractual indemnity protects auditor from losses attributable to conduct of company”s management, auditor to show contributory causal connection between that conduct and its losses-company may be liable for cost of auditor”s successfully defending itself against company”s action for negligence

Companies-voluntary winding up-creditors-proof of debt-contingent loss admissible to proof as debt-‘debt’ includes any liability to which company might become subject after date of winding up, by reason of any obligation incurred before then-admissibility depends on whether fair estimate possible

The applicant, Ernst & Young Cayman Islands (‘EYCI’), submitted proofs of debt to the respondent liquidators in the liquidations of Bristol Fund Ltd. (‘Bristol’) and Beacon Hill Master Ltd. (‘BHM’), in respect of losses it had sustained in its capacity as their auditor.

Bristol and BHM were Cayman mutual fund companies, which were part of a group of funds managed by a US fund manager, Beacon Hill Asset Management (‘BHAM’). Other operational responsibilities of Bristol and BHM were contracted out to different service providers, including EYCI, as the funds” auditor. Following proceedings against BHAM, Bristol and BHM in the United States, the funds eventually collapsed and were put into liquidation in the Cayman Islands. Certain investors and the respondents (on behalf of BHM) instituted proceedings, in separate actions, against EYCI, BHAM and another in the United States. Those actions centred on allegations that BHAM had fraudulently misrepresented the success and value of the funds, which had induced further investment, thereby causing loss to the investors upon the failure of the

funds, which could itself be attributed to BHAM”s fraud, and that such fraud could not have succeeded without the reckless and negligent conduct of EYCI in conducting audits.

While the liquidators” action had not yet been resolved, EYCI”s defence to the investors” action had been successful and all claims against it had been dismissed. EYCI therefore submitted proofs of debt to the respondents in respect of the costs it had incurred in defending the investors” action, and those costs anticipated to be incurred by them in respect of the liquidators” action, contingent on their successfully defending it. The respondents rejected those proofs of debt and EYCI appealed to the Grand Court in the present proceedings.

The applicant submitted that the court should order the respondents to admit the proofs of debt and provide for them accordingly because (a) clauses in each of its engagement letters indemnified it against any losses suffered relating to the services it provided to the funds, where such losses were attributable to any fraudulent acts or omissions, misrepresentations or wilful default by ‘management and employees’ of the funds; (b) BHAM was to be treated as part of the ‘management’ of the funds, responsible for formulating and implementing their investment strategy, as provided for in the investment management agreements with the funds; (c) its losses were attributable to the fraudulent conduct of BHAM-it only had to demonstrate a contributory causal connection between the conduct of BHAM, as ‘management,’ and its losses, which it had clearly done as, if BHAM had not so conducted itself, it would never have been implicated and sued; (d) the respondents were estopped from (i) denying that BHAM was part of the ‘management’ of the funds; and (ii) relying on the fact that no court had actually found BHAM guilty of the alleged fraud, in order to prevent EYCI from itself relying on the indemnity clauses, because the respondents had alleged fraudulent ‘mismanagement’ against BHAM and it would be unjust to allow them to resile from that representation; (e) the respondents could not deny liability to indemnify them against their losses on the basis that they were attributable to EYCI”s own negligence, as the losses themselves arose, and would arise, as a result of EYCI”s successful defence of allegations of that negligence; (f) the respondents should make provision for both its actual and anticipated losses, contingent on successfully defending the respondents” US action against them, as such losses were a liability admissible to proof, as they represented a ‘debt’ within the meaning of both r.13.12(1)(b) of the English Insolvency Rules 1986 and s.161 of the Companies Law (2004 Revision), albeit payable on a contingency, as they were liabilities to which the funds became subject, after the date of their winding up, by reason of their obligation undertaken before that date, i.e. to indemnify EYCI against any losses resulting from the conduct of its management; and (g) it was entitled to be regarded as an ‘officer’ of the funds, for the purposes of their articles of association, which indemnified such officers against costs, including legal costs, incurred by reason of any contract entered into, or act, or thing done by them in the discharge of their duties, as was the case here; in the absence

of legislation governing the status of auditors as officers, the question turned on the construction of the funds” articles, which did not preclude EYCI from being treated as ‘officers.’

The respondents submitted in reply that they were not liable to indemnify the applicant in respect of their legal costs because (a) BHAM was not to be treated as part of the ‘management’ for the purposes of the indemnity clauses in the applicant”s engagement letters; (b) in any case, no court had yet held that BHAM had, in fact, committed any fraudulent acts or omissions, misrepresentations or wilful default; (c) even if such fraud could be established, the applicant”s losses were not attributable to it, but resulted from its own negligence; (d) they were certainly not liable for EYCI”s anticipated losses, contingent on it successfully defending their own US action against it, as such loss was not a liability, or ‘debt,’ that could be admissible to proof, not being justly calculable; and (e) the applicant was not to be treated as an officer of the funds, being merely an independent contracted auditor, and to do so would cause conflict, in that it would make EYCI part of the management of the funds, and by...