Re Euro Bank Corporation

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: (Smellie, C.J.)
• Judgment Date: 30 November 2001
• Date: 30 November 2001

IN THE MATTER OF EURO BANK CORPORATION

ATTORNEY GENERAL

and

EURO BANK CORPORATION and CRYSTAL LIMITED

(Smellie, C.J.)

Grand Court

Companies-winding up under court”s supervision-proceedings against company-may grant leave to prosecute even if penalties unenforceable against company in supervised liquidation-if solvent after creditors paid, Crown may seek compulsory winding up on basis of debt created by penalty imposed-English Insolvency Rules, r.12.3(2)(b) inapplicable

Companies-winding up under court”s supervision-proceedings against company-grant of leave to continue existing proceedings validates retrospectively charges laid without leave-leave may include conditions to protect interests of creditors

Criminal Procedure-proceeds of criminal conduct-liquidation assets-duty of liquidators of bank holding alleged proceeds of crime to prevent account-holders from benefiting from crime-in assessing proof of debt to consider (i) whether contract of deposit invalidated by ex turpi causa rule, (ii) whether victims of crime assert better title than claimant, and (iii) principle that debt arising from illegality not provable in liquidation-relevant whether claimant relies on illegality to assert title

Criminal Procedure-proceeds of criminal conduct-restraint order-discharged under Proceeds of Criminal Conduct Law (2000 Revision), s.17(2) if proceeds belong to company in liquidation when order made-company”s assets impressed with statutory trust and ineligible for confiscation under Law

Held, granting retrospective leave to prosecute:

(1) The court would grant leave to the Crown to bring charges against Euro Bank. The public interest in criminal law enforcement was not necessarily met by the prosecution of the individuals responsible for the management and control of the bank when their criminal acts could be imputed to the bank itself. Furthermore, the Crown might yet obtain payment of a fine imposed on the bank after the winding-up date without prejudicing the bank”s creditors by disturbing the statutory trust over the liquidation assets. Although the fine could not be admitted to proof in the present winding up, if the bank proved to have surplus assets after the payment of creditors in the voluntary winding up under the court”s supervision, the Crown could petition for the subsequent compulsory liquidation of the bank on the basis of the debt it created. The same would apply to the enforcement of a confiscation order. The provisions of r.12.3(2)(b) of the Insolvency Rules, prohibiting the admission to proof of similar liabilities arising under UK legislation, did not apply here, as they were impracticable (within the meaning of O.102, r.17 of the Grand Court Rules). The UK rules did not contemplate a solvent liquidation estate whose assets properly belonged to the Crown. In the event that the bank defended the charges, the Crown”s costs of a successful prosecution authorized by the court would be provable in the same way (paras. 7–8; paras. 10–23).

(2) However, leave would be granted on the conditions that the prosecution should not proceed until after the trials of the individuals already charged, and the Crown would not petition for the compulsory winding up of the bank or seek a stay of the present winding up unless and until it became clear that the bank was solvent. These conditions would safeguard the interests of the creditors (para. 3; para. 24; para. 28).

(3) The court had the power, by granting leave to continue the proceedings already commenced, to validate retrospectively the charges brought against the bank without leave. Since the interests of shareholders rather than creditors would be affected by a future compulsory winding up, the fact that leave was retrospective was no more prejudicial to the existing creditors than if it had been granted in advance (para. 25; paras. 28–32).

(4) The liquidators had a duty as officers of the court to prevent account-holders from benefiting from their criminal conduct. Since most of the persons concerned were unlikely to be prosecuted in the Cayman Islands and the court could not make restraint orders against the bank, it would instead give the liquidators directions on dealing with proofs of

debt relating to the alleged proceeds of crime. They would need to consider (i) whether the funds belonged in law or in equity to the victims of the criminal conduct, and whether the liquidators were therefore on notice of a better title than the claimant”s; (ii) the principle that a debt arising from an illegal transaction and tainted with illegality could not be proved against liquidation assets covered by the statutory trust; and (iii) whether the contract of deposit between the account-holder and the bank was unenforceable on the basis of the ex turpi causa principle or as a money laundering arrangement within the meaning of s.22 of the Proceeds of Criminal Conduct Law. However, a claim to funds allegedly acquired by illegality or for an illegal purpose, based on a contract of deposit, could not be rejected out of hand unless the account-holder relied on the illegality to assert his claim (paras. 33–37; paras. 40–44; paras. 57–59).

(5) The liquidators” assessment of proofs of debt relating to criminal proceeds would differ, depending on whether the claimant was involved in committing the original offence or money laundering, or was innocent. Where an intention to launder the proceeds could be shown on the part of the bank, the liquidators could properly reject the proof of claim, since the claimant would have to rely on an illegal arrangement. The liquidators would be well advised to do so even where no such intention could be inferred. Any dispute could be resolved by examining the evidence of criminality and its link with the funds, and then applying the principles stated above. Where a proof of debt was submitted by or on behalf of a victim of crime, the funds should be paid to their true owner. If no proof were submitted, the funds would remain in the liquidation estate together with those subject to unproved claims, and would be amenable to criminal sanctions if the bank were later convicted (paras. 64–66).

(6) In the absence of any criminal intention and because they acted under directions from the court, the liquidators would not be guilty of complicity in the bank”s money laundering by admitting a proof of debt which was subsequently shown to have been liable to rejection on grounds of illegality. They would be directed to proceed on the assumption (acknowledged by the Crown) that any criminal sanction imposed by the court would not exceed the remaining sums standing to the credit of the tainted accounts (paras. 67–71).

(7) The restraint order against C Ltd. had properly been discharged for the additional reason that it had been made over realisable property after the commencement of the bank”s liquidation, and was therefore invalid under s.17(2) of the Proceeds of Criminal Conduct Law. The same applied to all other restraint orders made against the bank”s assets. The Crown may have been able to satisfy the requirements that the account was property held by a defendant (the bank, on the basis of its alleged money laundering of the proceeds of another”s crime), which had benefited to the value of all the funds in it, and not only to the extent of interest, fees and costs earned

on it. However, s.17(2) constituted an absolute bar to orders inhibiting the liquidators from distributing dividends. The Law recognized that the bank”s assets were now impressed with a statutory trust, excluded from the confiscatory scheme, and that account-holders lost their in personam rights and became entitled only to claim for dividends (paras. 74–81; para. 86).

Cases cited:

(1) Associated Leisure (Phonographic Equip.) Ltd. v. Associated Newsp. Ltd.ELR, [1970] 2 Q.B. 450; sub nom. Associated Leisure Ltd. v. Associated Newsp. Ltd., [1970] 2 All E.R. 754, considered.

(2) Ayerst (Inspector of Taxes) v. C. & K. (Constr.) Ltd., [1976] A.C. 167; [1975] 2 All E.R. 537, applied.

(3) Bank of S. Australia (No. 2), In reELR, [1895] 1 Ch. 578; (1895), 64 L.J. Ch. 397; sub nom. In re Bank of S. Australia Ltd., Ex p. Union Bank of Australia Ltd., 11 T.L.R. 265, followed.

(4) Bonotto v. Boccaletti, 2000 CILR 147.

(5) Burrows (J.) (Leeds) Ltd., In re, [1982] 1 W.L.R. 1177; [1982] 2 All E.R. 882.

(6) Chavasse, Ex p., In re GrazebrookENR(1865), 4 De G.J. & S. 655; 46 E.R. 1072; 34 L.J. Bcy. 17.

(7) Chun Wo Constr. Co. Ltd., Re, [1991] HKC 445, dicta of Ribeiro J. applied.

(8) Curtis v. Perry(1802), 6 Ves. 739; 31 E.R. 1285.

(9) Dyster, Ex p., In re MolineENR(1816), 1 Mer. 155; 35 E.R. 632.

(10) Food Controller v. Cork, [1923] A.C. 647; (1923), 92 L.J. Ch. 587.

(11) General Rolling Stock Co., In re, Joint Stock Discount Co.”s Claim(1872), L.R. 7 Ch. App. 646; 41 L.J. Ch. 732.

(12) Gordon v. Metropolitan Police Chief Commr., [1910] 2 K.B. 1080; (1910), 79 L.J.K.B. 957, followed.

(13) Holman v. Johnson (alias Newland)ENR(1775), 1 Cowp. 341; 98 E.R. 1120, dicta of Lord Mansfield applied.

(14) Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110; (1921), 90 L.J.K.B. 973.

(15) Lines Bros., Re, [1983] 1 Ch. 1; [1982] 2 All E.R. 183.

(16) Linkrealm Ltd., Re, [1998] BCC 478, applied.

(17) Lubin, Rosen & Associates Ltd., In re, [1975] 1 W.L.R. 122; [1975] 1 All E.R. 577.

(18) Muckleston v. Brown(1801), 6 Ves. 52; 31 E.R. 934; [1775–1802] All E.R. Rep. 501.

(19) National Employers Mutual Gen. Ins. Assn., Re, [1995] 1 BCLC 232; [1995] BCC 774, not followed.

(20) Pascoe (No. 2), In re, Ex p. Trustee of Bankrupt v. Lords Commrs. of H.M. Treasury, [1944] Ch. 310; [1944] 1 All E.R. 593, applied.

(21) R. v. Simpson, [1998] 2 Cr. App. R. (S.) 111; [1998] Crim. L.R. 292, followed.

(22) Saunders, In reELRUNK, [1997] Ch. 60; [1997] 3 All E.R. 992; sub nom. Bristol & West Bldg. Socy. v. Saunders, [1997] BCC 83, dicta of Lindsay J. applied.

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