Re SPhinX Group

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 12 February 2010
• Court: Grand Court (Cayman Islands)
• Date: 12 February 2010

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF THE SPHINX GROUP OF COMPANIES

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

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

R. Gillis, Q.C. and A.J. Bolton for Mr. Owens and Mr. Kavanagh;

N.R.F.C. Timms, Q.C. and R.L. Nelson for PricewaterhouseCoopers LLP;

K.J. Farrow, Q.C. for Mr. Aaron;

R. Davern for PricewaterhouseCoopers Cayman Islands.

Cases cited:

(1) Bristol Fund Ltd., In re, 2008 CILR 317, referred to.

(2) Davie v. Edinburgh Magistrates, 1953 S.C. 34; 1953 SLT 54, considered.

(3) E.M.I. Records Ltd. v. Ian Cameron Wallace Ltd., [1983] Ch. 59; [1982] 3 W.L.R. 245; [1982] 2 All E.R. 980, referred to.

(4) English Exporters (London) Ltd. v. Eldonwall Ltd., [1973] Ch. 415; [1973] 2 W.L.R. 435; [1973] 1 All E.R. 726; (1972), 25 P. & C.R. 379, referred to.

(5) Glaub Jewelers Inc. v. New York Daily News(1988), 535 N.Y.S. (2d) 532; 141 Misc.2d 890; 16 Media L. Rep. 1269, referred to.

(6) Gomba Holdings (U.K.) Ltd. v. Minories Fin. Ltd. (No. 2), [1993] Ch. 171; [1992] 3 W.L.R. 723; [1992] 4 All E.R. 588; [1992] BCC 877; [1993] BCLC 7, referred to.

(7) Gooch v. London Banking Assn.ELR(1886), 32 Ch. D. 41; 1 T.L.R. 642, referred to.

(8) Hughes v. Richards, [2004] P.N.L.R. 35; [2004] EWCA Civ 266, referred to.

(9) Levine v. American Fed. Group Ltd.(1992), 580 N.Y.S. (2d) 287; 180 A.D.2d. 575, referred to.

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

(11) National Comm. Bank Jamaica Ltd. v. Olint Corp. Ltd., [2009] 1 W.L.R. 1405; [2009] Bus. L.R. 1110; [2009] 1 CLC 637; [2009] 5 LRC 370; [2009] UKPC 16, considered.

(12) Oppenheimer v. British & Foreign Exch. & Inv. BankELR(1877), 6 Ch. D. 744; 46 L.J. Ch. 882; 26 W.R. 391; 37 L.T. 629, referred to.

(13) R. v. Abadom, [1983] 1 W.L.R. 126; [1983] 1 All E.R. 364; (1982), 76 Cr. App. R. 48; [1983] Crim. L.R. 254, considered.

(14) R-R Realisations, In re, [1980] 1 W.L.R. 805; [1980] 1 All E.R. 1019, dictum of Megarry, V.C. applied.

(15) Telewest Communs. Plc (No. 2), In re, [2005] BCC 36; [2005] 1 BCLC 772; [2004] EWHC 1466 (Ch); further proceedings, US Bankruptcy Ct., Southern District of N.Y., July 1st, 2004, unreported, referred to.

(16) Transnational Ins. Co. Ltd., In re, 1998 CILR 114; on appeal, 1999 CILR 207; on further appeal, sub nom.Cleaver v. Delta American Reins. Co., 2001 CILR 34, referred to.

(17) Wight v. Eckhardt Marine G.m.b.H., 2003 CILR 211, referred to.

Legislation construed:

Companies Law (2009 Revision), s.140(1): The relevant terms of this sub-section are set out at para. 10.

Companies Winding Up Rules 2008, O.18, r.4: The relevant terms of this rule are set out at para. 11.

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

Companies-compulsory winding up-creditors-contingent liabilities-costs-for purposes of setting monetary reserve to meet contingent liabilities, potential costs to be incurred by indemnified parties is maximum sum that might reasonably be incurred and taxed on ‘attorney and own client’ basis-court to be satisfied to high degree of assurance that reserve adequate-preferable to calculate sum using time/activity approach estimating time spent and likely fees at each stage of litigation

Companies-compulsory winding up-creditors-contingent liabilities-monetary reserve may be established by court to protect contingent creditors from risk of irremediable prejudice, court to establish monetary reserve of maximum possible contingent liabilities before liquidators may distribute assets to shareholders-inadequate reserve risks non-compliance with statutory priority to discharge liability to contingent creditors before returns to shareholders, under Companies Law (2009 Revision), s.140(1) and Companies Winding Up Rules, O.18, r.4

The liquidators and liquidation committee of a group of investment funds applied for the setting of a monetary reserve to meet its contingent liabilities.

The liquidators had initiated proceedings in New York seeking damages for negligence and fraudulent mismanagement against former professional service providers to the group. The nine defendants to the proceedings sought to rely on indemnities contained in their contracts with the group indemnifying them from liability-except for that arising from gross negligence, fraud or other intentional wrongdoing-and for the costs of

successfully defending any claims. Four of the indemnity claimants also appealed in the Cayman Islands against the liquidators” rejection of their proofs of debt. There were also 25 other potential indemnity claimants who had not been joined to the New York proceedings. The group was solvent and the liquidators and liquidation committee applied for the setting of a reserve to meet any potential contingent liabilities so that a distribution of surplus assets could be made immediately to investors and shareholders.

The liquidators submitted an expert report assessing the legal costs that were, on the balance of probabilities, likely to be incurred in the New York proceedings by the nine indemnity claimants. The expert used a ‘holistic’ approach, comparing the proceedings with comparable litigation and using his own experience and that of others to determine the likely costs. He did not, however, provide any calculations to demonstrate his conclusions and nor did he estimate costs for (i) the Cayman proceedings; (ii) defending other contribution or independent damages claims; (iii) the other indemnity claimants not featuring in the New York proceedings; (iv) the possibility of retrials; or (v) experts.

Two of the indemnity claimants submitted alternatively an expert report that determined the maximum costs that might reasonably be incurred in the New York and other proceedings using a ‘time/activity’ method based on the hours likely to be taken for each phase of litigation and multiplying it by the likely charge-out rates for the lawyers involved.

Held, setting the monetary reserve at the maximum amount that might reasonably be incurred:

(1) The reserve would have to be set at the full amount of potential liability since liabilities to contingent creditors had to be discharged before returns were made to shareholders, as outlined in s.140(1) of the Companies Law (2009 Revision) and O.18, r.4 of the Companies Winding Up Rules 2008. The court had to be aware of the risk of irremediable prejudice to the indemnity claimants if the reserve were set too low-investors with established proofs of debt might otherwise receive greater dividends than those to which they were entitled (through assets which might not turn out to be surplus), at the expense and subordination of contingent creditors. In respect of the monetary reserve for meeting legal costs, the court would set it at the maximum sum that might reasonably be incurred-rather than the sum likely to be incurred-by the indemnity claimants in defending any claims, usually to be taxed on the ‘attorney and own client’ basis. In determining that sum, and given the risk of irremediable prejudice to the claimants, the court would need to be given a high degree of assurance-and not just satisfied on a balance of probabilities-that the reserve would be adequate. It would also need to consider other potential claims for indemnification that might arise from awards to the joint official liquidators and claims for contribution or from rogue investors made against the indemnity claimants. It was determined that the proposed scheme of distribution would not be able to proceed

until other arrangements (through set-off agreements and consensual and compulsory releases recognized as enforceable both in the Cayman Islands and the United States) were in place, to the satisfaction of the court, to meet these other heads of contingent claims (paras. 9–16; paras. 18–19; paras. 30–35; para. 39).

(2) The time/activity approach (based on estimated fees and costs for time spent on the litigation) used by the expert of the two indemnity claimants would be favoured to determine the maximum costs they might reasonably incur at each stage in the New York proceedings and then uplifted ratably to give the total reserve for the nine indemnity claimants. The absence of any detailed workings and comparables in the liquidators” expert report was a fundamental failing which meant the court could not assess the reliability of its holistic approach and it would therefore be rejected. Having used the time/activity approach to calculate the maximum costs of the nine indemnity claimants for each stage of the New York proceedings, the court also accounted for costs which might potentially arise (a) in defending the other claims such as those for contribution or damages; (b) in proceedings involving the other 25 indemnity claimants; (c) for retrials; and (d) for the Cayman proof of debt proceedings, and fixed a total reserve of nearly US$120m. (paras. 48–55; para. 68; paras. 70–110).

1 SMELLIE, C.J.: The SPhinX Group of Companies are investment fund entities now in official liquidation under the aegis of this court. The joint official liquidators have applied to the court for the setting of a monetary reserve to meet the contingent liabilities of the SPhinX companies, as such contingent liabilities may arise from certain indemnities given by them. These are contractual indemnities given to persons in respect of various fiduciary relationships formerly held as between those persons and the SPhinX companies and in respect of which those persons have filed or may yet file claims in the liquidations.

2 There are potentially 34 such indemnity claimants, nine of whom have participated in the hearing of this, the joint official liquidators” application. It is, however, accepted by the joint official liquidators that the...