Re SPhinX Group

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 23 February 2009
• Court: Grand Court (Cayman Islands)
• Date: 23 February 2009

Grand Court

(Smellie, C.J.)

IN THE MATTER OF THE SPHINX GROUP OF COMPANIES

IN THE MATTER OF DPM MELLON LLC and DPM MELLON LIMITED

R. Sheldon, Q.C., A.J. Walters and J.G. Manning for the applicants;

T. Lowe, Q.C. and Ms. C.J. Bridges for the joint official liquidators;

A. Phillips, Q.C. and A. Turner for the liquidation committee.

Cases cited:

(1) Al-Bassam v. Al-Bassam, [2004] WTLR 757; [2004] EWCA Civ 857, distinguished.

(2) Brasil Telecom S.A. v. Opportunity Fund, 2008 CILR 211, referred to.

(3) Curtis v. Lockheed Martin UK Holdings Ltd., [2008] 1 CLC 219; [2008] EWHC 260 (Comm), distinguished.

(4) KTH Capital Management Ltd. v. China One Fin. Ltd., 2004–05 CILR 213, referred to.

(5) Konamaneni v. Rolls-Royce Indus. Power (India) Ltd., WLR[2002] 1 W.L.R. 1269; [2002] 1 All E.R. 979; [2002] 1 BCLC 336, referred to.

(6) Kuwait Asia Bank E.C. v. National Mutual Life Nominees Ltd., [1991] 1 A.C. 187; [1990] 3 All E.R. 404; [1990] 2 Lloyd”s Rep. 95, referred to.

(7) Ojjeh Trust, In re, 2008 CILR N[3], referred to.

(8) Paget-Brown & Co. Ltd. v. Omni Secs. Ltd., 1999 CILR 184, referred to.

(9) Reichhold Norway ASA v. Goldman Sachs Intl., [2000] 2 All E.R. 679; [1999] 2 All E.R. (Comm) 174; [1999] 2 Lloyd”s Rep. 567, referred to.

(10) Spiliada Maritime Corp. v. Cansulex Ltd., The Spiliada, [1987] A.C. 460; [1986] 3 All E.R. 843; [1987] 1 Lloyd”s Rep. 1, referred to.

(11) T Trust, In re, 2002 CILR N[1], referred to

(12) TMSF v. Wisteria Bay Ltd., 2007 CILR 310, referred to.

(13) Tilling v. Whiteman, [1980] A.C. 1; [1979] 1 All E.R. 737; [1979] J.P.L. 834, referred to.

Civil Procedure-trial of preliminary issue-appropriate issues-proper case management requires trial only if would help reach just and timely outcome in case-if concurrent proceedings abroad, trial unlikely to be directed if unhelpful because may lead to inconsistency and delay

The applicants, the administrators of a group of hedge funds now in liquidation, appealed against the liquidators” rejection of their proof of debt in the liquidation of a Cayman company.

The applicants had been appointed administrators of a group of hedge funds by virtue of service agreements governed by the laws of New York. It was alleged that fraud and mismanagement had resulted in the failure of these funds and the companies had gone into liquidation in the Cayman Islands with joint official liquidators appointed. Subsequently, the liquidators had initiated proceedings in New York against the applicants for damages suffered in the collapse of the hedge funds because they had failed adequately to protect the funds” assets. Concurrently, the liquidation was ongoing in the Cayman Islands, which the liquidators sought to have stayed.

During the proceedings, it was alleged that the applicants were vicariously liable for the breaches of duty of one of its senior operatives, who had been nominated as a director of the companies, and secondly, that they had acted in breach of the terms of the funds and of the Companies Law (2007 Revision) by failing to segregate the investors” assets. The applicants sought directions to have these issues preliminarily resolved before the main trial.

The applicants submitted that the court should direct the trial of these preliminary issues because (a) this was the court of the jurisdiction of incorporation of the companies and thus, notwithstanding the proceedings in New York, it was the most appropriate forum for the resolution of these matters; and (b) the issue of vicarious liability had already been settled in its favour and the court should so declare.

The joint official liquidators submitted in reply that the issue of vicarious liability was not to be resolved as a matter of Cayman law, but rather one of New York law, which governed the service agreements.

The court also considered whether, even though these issues were amenable to resolution by a Cayman court, there were not other practical implications of ordering a trial of the preliminary issues which had to be taken into account.

Held, dismissing the application:

The application seeking directions for the trial of the preliminary issues would be refused. This was not a question of which was the most appropriate forum for deciding these issues, as it was clear that the New York court should determine the main proceedings, but rather it was a matter of proper case management. A trial of the preliminary issues would only be directed if it would help to reach a just and timely outcome in the case and to order otherwise would only increase the cost, time and anxiety of the proceedings. In this case it was likely that any such trial would prove to be an expensive exercise in futility. The New York court had not requested any assistance on these issues and any decision in the Cayman Islands would not necessarily be binding on the parties in the New York proceedings, nor were they guaranteed to be of any use, particularly in relation to the issue of vicarious liability, given that New York law governed the service agreements. Further, any proceedings in the Cayman Islands would risk delaying the decision of the New York court and would also result in the possibility of inconsistent decisions. A trial of the preliminary issues would therefore not be ordered and proceedings in the Cayman Islands would be stayed pending the outcome of the decision in New York (para. 30; paras. 37–44).

1 SMELLIE, C.J.: I have before me cross-applications by DPM Mellon LLC and DPM Mellon Ltd. (‘DPM’) and by the joint official liquidators of the SPhinX Group. By its application, DPM seeks directions for the trial of certain preliminary issues in these proceedings. The joint official liquidators, on the other hand, seek an order for a stay of these proceedings pending the outcome of related proceedings in New York. DPM contends that the preliminary issues should be determined before the stay is ordered, but otherwise it does not oppose the joint official liquidators” application.

2 The relevant background is as follows. In December 2001, Plus Funds Group Inc. (‘Plus Funds’) entered into an exclusive licence with Standard and Poor”s (‘S&P’)-a division of McGraw-Hill Companies-to create and market investment products designed to achieve returns consistent with the S&P Hedge Fund Index, a composite index measuring major hedge fund strategies. Several months later, Plus Funds created the SPhinX Funds Group of Companies (‘SPhinX’ being an acronym for the S&P Index), a family of Cayman hedge funds specifically designed to offer ‘full transparency’ to investors, by making available daily net asset

value reports of investments to investors on a real-time basis, with performance aimed at tracking the S&P Hedge Fund Index.

3 DPM became the administrator of the SPhinX Group by virtue of service agreements made in June 2004 (‘the service agreements’). The service agreements are governed by the laws of New York State.

4 For a number of reasons, including alleged fraud and mismanagement, the SPhinX funds failed and the SPhinX companies were placed into liquidation in 2006 and the current joint official liquidators were appointed. The joint official liquidators subsequently instituted proceedings in New Jersey (later consolidated with other proceedings in New York) on behalf of the SPhinX companies and as assignees of a number of other claims, assigned by 16 other entities or individuals, who were investors in the SPhinX companies.

5 The joint official liquidators” claim in the New York proceedings is for (i) $263m. (plus interest) in damages...