Re SPhinX Group

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 05 May 2010
• Court: Grand Court (Cayman Islands)
• Date: 05 May 2010

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF THE SPHINX GROUP OF COMPANIES

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

Cases cited:

(1) City of Swan v. Lehman Bros. Australia Ltd.UNKUNK (2009), 179 FCR 243; 260 ALR 199; [2009] FCAFC 130; further proceedings, sub nom. Lehman Bros. Holdings Inc. v. City of SwanUNK(2010), 240 CLR 509; 265 ALR 1; [2010] HCA 11, considered.

(2) Fowler v. LindholmUNK(2009), 178 FCR 563; 259 ALR 298; [2009] FCAFC 125, applied.

(3) Glendale Land Dev. Ltd., ReUNK(1982), 7 ACLR 171; [1982] 2 NSWLR 563, dicta of McLelland J. applied.

(4) Guardian Assur. Co., Re, [1917] 1 Ch. 431; (1917), 86 L.J. Ch. 214; 61 Sol. Jo. 232, 116 L.T. 193, referred to.

(5) Johnson v. Davies, [1999] Ch. 117; [1998] 3 W.L.R. 1299; [1998] 2 All E.R. 649; [1999] BCC 275; [1998] 2 BCLC 252, referred to.

(6) Lehman Bros. Intl. (Europe), Re, [2010] 1 BCLC 496; [2010] BCC 272; [2009] EWCA Civ 1161, dicta of Patten, L.J. applied.

(7) Madden v. Anglo Irish Bank Corp. plc, [2004] IESC 108, referred to.

(8) N.F.U. Dev. Trust Ltd., In re, [1972] 1 W.L.R. 1548; [1973] 1 All E.R. 135, referred to.

(9) Prudential Assur. Co. Ltd. v. PRG Powerhouse Ltd., [2008] 1 BCLC 289; [2007] BCC 500; [2007] EWHC 1002 (Ch), dicta of Etherton J. applied.

(10) RA Secs. Ltd. v. Mercantile Credit Co. Ltd., [1995] 3 All E.R. 581; [1994] 2 BCLC 721; [1994] BCC 598, dicta of Jacob J. applied.

(11) SIIC Medical Science & Technology Ltd., In re, 2003 CILR 355, considered.

(12) Savoy Hotel Ltd., In re, [1981] Ch. 351; [1981] 3 W.L.R. 441; [1981] 3 All E.R. 646, dicta of Nourse J. applied.

(13) Shaw v. Royce Ltd., [1911] 1 Ch. 138; (1910), 80 L.J. Ch. 163; 103 L.T. 712, referred to.

(14) T & N Ltd. (No. 3), Re, [2007] 1 All E.R. 851; [2007] 1 BCLC 563; [2007] Bus. L.R. 1411; [2006] EWHC 1447 (Ch), dicta of Richards J. applied.

Legislation construed:

Companies Law (2009 Revision), s.86: The relevant terms of this section are set out at para. 27.

Companies-arrangements and reconstructions-‘compromise or arrangement’-scheme within Companies Law (2009 Revision), s.86 even if involves claims against third party, provided sufficiently close relationship between subject-matter and company”s and creditors/members” relationship-requirement of ‘give and take’ from all relevant parties

Companies-arrangements and reconstructions-enforcement-court”s sanction of scheme allows enforcement by and against parties to scheme but not by third party-third party may enforce release of claims against it if party to deeds by which claims ‘treated as released’

The liquidators of the respondent companies sought an order, under s.86 of the Companies Law (2009 Revision), sanctioning schemes of arrangement.

The companies had given their former auditors, directors and consultants contractual indemnities against claims which might be brought against them arising from their involvement with the companies. The indemnities covered any damages for which they might be found liable in negligence, and any legal costs incurred in successfully defending a claim. The companies subsequently collapsed, apparently as the result of alleged fraud, and went into liquidation in the Grand Court. The liquidators brought proceedings in New York in respect of the alleged fraud, to which a number of the former auditors, directors and consultants were joined as defendants. Additionally, it was possible that one of them would be sued in the Cayman Islands as a result of its involvement with the companies, and it was therefore possible that the liquidators would need to pay out under the indemnities. In keeping with the statutory order of priorities, the liquidators needed to make provision for claims under the indemnities prior to making any distributions to the companies” investors. Although the legal costs of the New York proceedings had been estimated and provided for, there were potential sources of liability which might give rise to claims under the indemnities but which were not contingent enough to be estimated. These included claims against the former auditors, directors and consultants by investors, and ‘ricochet’ claims-claims brought against a former auditor, director or consultant by a third party

seeking to recover its losses, having been successfully sued by an investor. The liquidators therefore proposed schemes of arrangement compelling the investors to release their claims against any former auditor, director or consultant, and also any claims which might result in a ricochet claim against a former auditor, director or consultant. It was proposed to do this by means of an agreement between the investors and the company that the investors not pursue such claims, and also deeds of release by which such claims would be ‘treated as released,’ to which the former auditors, directors and consultants would be parties.

The liquidators applied for directions as to whether the court had the jurisdiction, under s.86 of the Companies Law (2009 Revision), to sanction the proposed schemes if they were approved by at least 75 per cent of the investors-the advantage being that they would know whether the proposed schemes had a sound juridical basis before proceeding with scheme meetings.

The court considered whether (a) the proposed schemes were within the scope of s.86, given that they incorporated releases of claims against third parties; and (b) the proposed releases would be enforceable, and if so by and against whom.

Held, affirming the court”s jurisdiction:

(1) The court had jurisdiction to sanction a scheme of arrangement incorporating releases of claims against third parties. Section 86 of the Companies Law (2009 Revision) required an arrangement or compromise to be between a company and its creditors/members. The fact that a scheme involved a third party did not, however, prevent it from falling within s.86, provided that there was a sufficiently close connection between the subject-matter of the scheme and the relationship between the company and its creditors/members. The term ‘arrangement’ in s.86 would be construed broadly, merely requiring the proposed scheme to involve elements of ‘give and take’ by all relevant parties. Since the releases in the proposed schemes offered tangible benefits to all parties-the companies, in that the monetary reserve required to protect the former auditors, directors and consultants could be reduced; the investors, in that the amount of money available for distribution to them would increase; and the former auditors, directors and consultants, in that claims against them would be released-and since the proposed scheme was an arrangement between the companies” liquidators and the investors in that it was a compromise of the rights between them, the proposed scheme would come within the scope of s.86 (paras. 39–45; paras. 56–64; para. 67).

(2) Moreover, the proposed releases of claims against the former auditors, directors and consultants, and of claims which might have resulted in ricochet claims against them, would be enforceable by all parties. The court”s sanctioning of the schemes-agreements between the liquidators and the investors that the investors not pursue such claims-would allow the releases to be enforced by and as against any party to the schemes, including investors opposed to the schemes, who would

nonetheless be bound because of the statutory hypothesis of contract. Further, although the court”s sanction would not of itself allow the schemes to be enforced by the former auditors, directors and consultants (who would not be party to them), it was proposed that they be parties to the deeds of release themselves, by which the claims would be ‘treated as released,’ and on this basis would be able to rely on and enforce the releases. The court would therefore have jurisdiction to sanction the proposed schemes (paras. 68–76).

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

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

Ms. S. White for Pricewaterhouse Coopers Cayman Islands;

Ms. B.M. Carey for Bank für Arbeit und Wirtschaft;

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

M.A. Kish for Rotary International;

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

J.G. Manning for DPM;

A.J. Bolton for Mr. Kavanagh and Mr. Owens.

1 SMELLIE, C.J.: The issue to be resolved is whether the court has jurisdiction to sanction a scheme of arrangement, pursuant to s.86 of the Companies Law (2009 Revision), that includes within its terms provisions which require participants in the scheme of arrangement (here the investors/shareholders) to surrender rights that they have (or may have) against third party non-participants to the scheme of arrangement. Framed in that way, the issue is one of both scope and enforceability, and I will come below to address it under those separate headings. The essential background is as follows.

2 The SPhinX companies are investment fund companies now in official liquidation before this court. The SPhinX funds had been promoted by PlusFunds Group Inc., who had entered into an exclusive licence with Standard & Poor”s-a division of the McGraw-Hill Companies-to create and market investment products designed to achieve returns consistent with the Standard & Poor”s Hedge Fund Index, a corporate index measuring major hedge fund strategies: hence the acronym ‘SPhinX.’

3 For a number of reasons, including alleged fraud and mismanagement on the part of the funds” former investment manager, the ill-fated Refco Group and Refco”s president and CEO Phillip Bennett, the SPhinX funds collapsed and were put into liquidation in 2006, when the JOLs were appointed. The JOLs subsequently instituted proceedings in the New Jersey District Court (later consolidated with other proceedings brought by PlusFunds in the New York District Court) seeking to...