Re SPhinX Group

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 20 July 2010
• Court: Grand Court (Cayman Islands)
• Date: 20 July 2010

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF THE SPHINX GROUP OF COMPANIES

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

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

W. Trower, Q.C., G.F. Ritchie, Q.C. and D.W. Collier for Deutsche Bank;

A.A. Galatopolous and Ms. R. Millen for Rotary International;

Ms. S.E. Dobbyn for Contrarian Capital Management;

N.K. Meeson, Q.C. for Bank für Arbeit & Wirtschaft;

A.J. Walters and J.G. Manning for DPM and PricewaterhouseCoopers.

Cases cited:

(1) Alsop Wilkinson v. Neary, [1996] 1 W.L.R. 1220; [1995] 1 All E.R. 431, referred to.

(2) Ayerst (Inspector of Taxes) v. C. & K. (Constr.) Ltd., [1976] A.C. 167; [1975] 3 W.L.R. 16; [1975] 2 All E.R. 537, referred to.

(3) Basis Yield Alpha Fund (Master), In re, 2008 CILR 50, applied.

(4) Bedford (Duke) v. Ellis, [1901] A.C. 1; (1900), 70 L.J. Ch. 102; [1900–03] All E.R. Rep. 694, dictum of Lord Macnaghten applied.

(5) Buckton, In re, Buckton v. Buckton, [1907] 2 Ch. 406; (1907), 76 L.J. Ch. 584, dicta of Kekewich J. applied.

(6) Carnie v. Esanda Fin. Corp. Ltd., (1995), 182 C.L.R. 398; 127 A.L.R. 76, referred to.

(7) Charge Card Servs. Ltd., Re, [1986] BCLC 316, referred to.

(8) City of London Sewers Commr. v. GellatlyELR(1876), 3 Ch. D. 610, dicta of Jessel, M.R. applied.

(9) Cotorro Trust, In re, 1997 CILR 1, referred to.

(10) HSH Cayman I GP Ltd. v. ABN AMRO Bank N.V., 2010 (1) CILR 114, applied.

(11) Houldsworth v. City of Glasgow BankELR(1880), 5 App. Cas. 317; [1874–80] All E.R. Rep. 333, applied.

(12) John v. Rees, [1970] Ch. 345; [1969] 2 W.L.R. 1294; [1969] 2 All E.R. 274, dicta of Megarry J., applied.

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

(14) McDonald v. Horn, [1995] 1 All E.R. 961; [1995] I.C.R. 685, referred to.

(15) National Grid Co. plc v. Mayes, [2001] 1 W.L.R. 864; [2001] 2 All E.R. 417; [2001] I.C.R. 544; [2001] UKHL 20, followed.

(16) Smith v. Croft, [1986] 1 W.L.R. 580; [1986] 2 All E.R. 551; [1986] BCLC 207, referred to.

(17) Taff Vale Ry. Co. v. Amalgamated Socy. of Railway Servants, [1901] A.C. 426, dicta of Lord Lindley applied.

(18) Tilling v. Whiteman, [1980] A.C. 1; [1979] 2 W.L.R. 401; [1979] 1 All E.R. 737; [1979] J.P.L. 834, referred to.

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

(20) Westdock Realisations Ltd., Re, [1988] BCLC 354; (1988), 4 BCC 192, dicta of Browne-Wilkinson, V.-C. applied.

Legislation construed:

Grand Court Law (2008 Revision), s.18(2): The relevant terms of this sub-section are set out at para. 25.

Companies-compulsory winding up-representation order-court may appoint representative to act for group of parties with common interest in same outcome-although no express jurisdiction to make representation orders in winding-up proceedings, may do so by applying practice of English High Court (the English inherent jurisdiction) under Grand Court Law (2008 Revision), s.18(2), effectively recognizing existence of inherent jurisdiction-may make order if hearing all parties impractical because too many

Companies-compulsory winding up-costs-may exceptionally order costs to be paid pre-emptively from liquidation estate-unlikely if hostile or unrepresentative litigation and judge unlikely ultimately to award costs to applicant-mere fact that applicant represents group of parties does not necessarily justify pre-emptive costs-may be justified if all parties view resolution of issues as beneficial to liquidation as a whole

The liquidators of companies applied for directions as to the proper administration of the liquidation estate.

The companies had collapsed, apparently as the result of an alleged fraud, and were in liquidation in the Grand Court. The liquidators brought proceedings in New York in respect of the alleged fraud. Nonetheless, there remained some issues which would not be resolved by the proceedings in New York, and the liquidators applied to the Grand Court for directions as to the proper administration of the liquidation estate in respect of 23 distinct issues-14 of which the court would resolve in a forthcoming hearing. Several other parties, including investors and claimants under contractual indemnities, were joined to the proceedings, since they had interests in and would be bound by the outcome of the Grand Court”s decision.

The liquidators applied for an order appointing representatives to be heard by the court in the forthcoming hearing on behalf of those groups of parties sharing a common interest in securing the same outcome. They submitted that the court had the jurisdiction to do so, since (a) although there were no express Cayman rules allowing it to make such orders in winding-up proceedings, it could nonetheless do so by exercising its

inherent jurisdiction; and (b) the inherent jurisdiction was effectively recognized by s.18(2) of the Grand Court Law (2008 Revision), which provided that, if there were an apparent gap in the rules governing Cayman procedure, the court could apply the practice of the English High Court, where the making of representation orders was established procedure. Section 18(2) of the Grand Court Law (2008 Revision) therefore gave the court jurisdiction to make the orders. They further submitted that the court should make the representation orders, since (c) all interested parties should be able to have their arguments heard, but the number of parties was so large as to make it impracticable to conduct a hearing involving all of them; and (d) the appointment of representatives to act for those parties with common interests was therefore appropriate. They further applied for the costs of the representative parties to be pre-emptively paid from the liquidation estate, submitting that (e) all the parties were agreed that the resolution of the issues was in the interest of the administration of the liquidation estate as a whole; and (f) the resolution of the issues would be facilitated by awarding pre-emptive costs to the representative parties.

The court considered (a) whether, and in what circumstances, it could make a representation order; (b) the circumstances in which it would make an order for pre-emptive costs; and (c) whether to impose caps on any order for pre-emptive costs.

Held, granting the orders:

(1) The court would make a representation order. Although there were no express rules allowing it to make such orders in winding-up proceedings, it could nonetheless do so by exercising its inherent jurisdiction. The inherent jurisdiction-the ‘residual source of powers which the court may call upon as necessary whenever it is just or equitable to do so’-was effectively recognized by s.18(2) of the Grand Court Law (2008 Revision), which provided that, if there were an apparent gap in the rules governing Cayman procedure, the court could apply the practice of the English High Court-which was itself derived from the English inherent jurisdiction. Since the making of representation orders was established procedure in the English courts, the court would have jurisdiction to make such an order here. Moreover, the making of a representation order-‘a flexible tool of convenience in the administration of justice’-was justified. It was necessary that all interested parties could have their arguments heard, but the number of parties was so large as to make a hearing involving all of them impracticable. Furthermore, there were groups of parties (on both sides of the issues) which shared a common interest in advancing the same arguments, and which would benefit in common from the relief sought. The court would therefore appoint representatives to be heard on behalf of those groups with a common interest in securing the same outcome (paras. 23–34).

(2) Further, the court would order that the costs of the representative parties be pre-emptively paid from the liquidation estate. An order for

pre-emptive costs would only rarely be made in liquidations-special circumstances would be required to displace the ordinary principle that costs follow the event. In particular, the court would be unlikely to make an order for pre-emptive costs in the context of hostile litigation in which the applicant could not be said to be representing a group of interested parties or the estate as a whole and where the judge was not likely ultimately to award costs to the applicant. On the facts, however, all of the parties regarded the resolution of the issues here as being for the benefit of the liquidation as a whole-and not just of the respective parties. The court would therefore order the costs to be pre-emptively paid from the liquidation estate, albeit capped as to the amount chargeable, based on maximum hourly rates (paras. 35–49).

1 SMELLIE, C.J.: On this application, the joint official liquidators (‘JOLs’) seek orders for the following matters:

(a) the appointment of representative parties of the classes of investors of the SPhinX companies who are interested in the resolution of certain issues which have been identified for resolution by the court;

(b) pre-emptive costs orders to cover the reasonable legal costs to be incurred by the representative parties in the argument of the issues before the court; and

(c) other procedural directions for the determination of the issues, specifically as such directions relate to assets and liabilities, the ranking of claims and the distribution of the assets.

The issues

2 The issues were first identified in a summons of the JOLs (taken out in June 2007) as questions which need to be resolved by the court in aid of the proper administration of the estate. They have been, as at May 26th, 2010, identified as involving some 23 distinct questions (albeit within three broad categories), more specifically detailed in a position paper of the JOLs which was made...