Re ICP Strategic

JurisdictionCayman Islands
Judge(Jones, J.)
Judgment Date04 April 2014
Date04 April 2014
CourtGrand Court (Cayman Islands)
Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF ICP STRATEGIC CREDIT INCOME FUND LIMITED and ICP STRATEGIC CREDIT INCOME MATER FUND LIMITED

D.F. Hughes for the applicant.

Cases cited:

(1) Giles v. Thompson, [1993] 3 All E.R. 321, applied.

(2) Glegg v. Bromley, [1912] 3 K.B. 474, applied.

(3) Grovewood Holdings PLC v. James Capel & Co. Ltd., [1995] Ch. 80; [1995] 2 W.L.R. 70; [1994] 4 All E.R. 417; [1994] 2 BCLC 782; [1995] BCC 760, considered.

(4) Greenhaven Motors Ltd., Re, [1999] 1 BCLC 635; [1999] BCC 463, applied.

(5) Guy v. ChurchillELR(1888), 40 Ch. D. 481, referred to.

(6) Latoya v. Att. Gen., C.A., February 14th, 2012, unreported, considered.

(7) London & Regional (St. George”s Court) Ltd. v. Ministry of DefenceUNK(2008), 121 Con. L.R. 26; [2008] All E.R. (D.) 249; [2008] EWHC 526 (TCC), followed.

(8) 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, applied.

(9) Quayum v. Hexagon Trust Co. (C.I.) Ltd., 2002 CILR 161, followed.

(10) Ruttle Plant Ltd. v. Environment, Food & Rural Affairs Secy. (No. 3), [2009] 1 All E.R. 448; [2008] BPIR 1395; [2008] EWHC 238 (TCC), applied.

(11) Wallersteiner v. Moir (No. 2), [1975] Q.B. 373; [1975] 2 W.L.R. 389; [1975] 1 All E.R. 849, applied.

Legislation construed:

Companies Law (2013 Revision), Third Schedule, Part 1, para. 1: The relevant terms of this paragraph are set out at para. 10.

Third Schedule, Part 1, para. 8: The relevant terms of this paragraph are set out at para. 15.

Companies Winding Up (Amendment) Rules 2013, O.25: The relevant terms of this order are set out at para. 23.

Companies-liquidators-control by court-court only to sanction commencement of litigation if has reasonable prospect of success and in creditors” best interests-not in creditors” best interests merely because likely to be successful-court to consider how litigation funded-liquidators not permitted to commence unmeritorious litigation for sole purpose of obtaining settlement

Companies-liquidators-funding of litigation-court may sanction liquidator”s entering into contingency fee agreement under Companies Winding Up Rules, O.25, r.2(1) if governed by Cayman law and performed entirely in foreign jurisdiction where agreement legal and compliant with rules of conduct

Companies-liquidators-funding of litigation-liquidators entitled to assign fruits of litigation to third party, provided no assignment of ability to control litigation (whether directly or indirectly)-indirect control includes ability to terminate contract, cease paying legal fees, or insist on continuation of claim after liquidators decide to discontinue action

The joint official liquidators of the funds applied for the court”s sanction of their decision to bring an action against a US bank and a US law firm for assisting in a breach of trust committed by the funds” CEO.

The funds were part of a master/feeder structure and were both owned and controlled by C. C also owned I, the master fund”s manager, which was based in New York, and a further company, T. The master fund invested heavily in collateralized debt obligations-secured by residential mortgage backed securities and financed by the US bank-offered by T. When the housing market collapsed, however, the security reduced in value and T became liable to the bank for margin payments. During 2008–2009, C directed I to use money from the master fund to meet T”s obligations to the bank. The bank, on the basis of the payments from the master fund, waived T”s obligation to pay the debt-although it reserved the ability to demand payment from T if any claim or demand for repayment of the money from the master fund were made.

The funds went into liquidation and the joint official liquidators were granted leave to bring an action against C, I and T. They further wished to enter into a contingency fee agreement with US attorneys, R, to enable them to bring an action against the bank and the New York law firm, D, which had provided legal advice to I. Under the Companies Law (2013 Revision), Schedule 3, Part I, para. 1, however, the liquidators could only commence litigation if sanctioned by the court.

The liquidators submitted that the court should sanction their decision to commence proceedings as they had a good, arguable case against both the bank and D. The limitation period for a legal malpractice claim in New York was three years, but US law allowed the liquidators to bring the action in any state in which the law firm had an office. As the time limit in the District of Columbia, in which D had an office, did not begin to run until the client actually suffered damage from the malpractice (and there was scope for arguing that the damage could not have been discovered until the JOLs had been appointed in 2010), the court should sanction the commencement of proceedings. Further, the court should sanction the decision to enter into the contingency fee agreement. The agreement complied with the Companies Winding Up Rules, did not violate the principles of champerty and maintenance, and the liquidators had the final and exclusive right to make settlement decisions (subject to the court”s sanction). Further, the Grand Court was entitled to decide any dispute relating to the agreement and R was fully able to meet its financial obligations under the agreement.

Held, sanctioning the agreement:

(1) The court would sanction the commencement of the litigation. The proposed cause of action had a reasonable prospect of success and the proceedings were in the creditors” best interests. As officers of the court, the liquidators were required to perform their duties fairly and would not be allowed to threaten or commence litigation in order to obtain a settlement. There was, however, evidence showing that they had a good, arguable case against the bank and D. The bank, by issuing the waiver, had implicitly shown that it knew that the money was from the master fund and that the fund might attempt to reclaim the money. Further, D had continued to act for I despite knowing that the master fund was not individually represented and having drafted letters for C relating to the master fund”s payments to the bank. It was therefore arguable that D had acted despite being subject to a conflict of interest. Although this claim had expired in New York, the court accepted that the liquidators could commence the litigation in the District of Columbia. This did not, however, automatically mean that the litigation was in the creditors” best interests. There was still a risk that the liquidators might lose the case and that the associated costs would deplete the liquidation fund. The court would therefore be required to consider how, and by whom, the litigation was financed (paras. 6–11).

(2) There were three distinct forms of agreements for funding litigation: (a) a litigation funding agreement, under which a third party, whether or not it had an interest in the liquidation, advanced money to the liquidators in exchange for a share of any sums awarded; (b) a contingency fee agreement, under which a law firm agreed to conduct a cause of action on the ground that its remuneration would be limited to a share of any proceeds of the claim; and (c) a conditional fee agreement, under which a law firm agreed to conduct a cause of action, reducing their hourly fee in the event that the claim is unsuccessful and uplifting it should it be successful. The attorneys would be remunerated whether they won or lost in both a litigation funding agreement and a conditional fee agreement, but not in a contingency fee agreement. A contingency fee agreement would therefore cause a conflict of interest for the attorney and would be against Cayman public policy. The court was not able to authorize a liquidator to enter into a contract which was against public policy and, further, such authorization would be unable to validate the agreement as it would be otherwise void and unenforceable. The court would therefore refuse to sanction a contingency fee agreement if it related to proceedings taking place in Cayman (paras. 12–13; paras. 19–22).

(3) When entering into a litigation funding agreement, there was nothing to prevent the liquidators from assigning the ‘fruits of the action’ to a third party. They were not, however, entitled, under the Companies Law, Schedule 3, Part I, para. 3 (which gave the power to sell the company”s property), to assign a cause of action which was personal to the company. Further, they were not entitled to assign the proceeds of an action which had been vested in them in their role as liquidators (e.g. a preference claim). Such a claim did not form part of the company”s property, which was limited to the property owned by the company at the time that it entered liquidation, and any assignment of the liquidator”s fiduciary power would necessarily be contrary to public policy. Further, any funding agreement which gave the third party the ability to control the litigation would be void on the grounds of maintenance and champerty. This included the ability to indirectly exert undue influence or control. Such an agreement risked the integrity of the litigation process and, accordingly, corrupted public justice. The party who provided the funding must not, therefore, be entitled to terminate the contract, cease paying the legal fees or cease providing legal services. Further, it must not be able to insist upon the continuation of the legal claim if the liquidators no longer wish to pursue it, or demand payment for services already rendered should the liquidator decide to discontinue the action. The proposed agreement did not allow D to control the litigation in any way and allowed the court to determine any disputes arising from the agreement. Further, the court was satisfied that D had enough financial resources to complete the litigation (paras...

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