The Companies Act (2020 Revision) and Onetradex Ltd (in Provisional Liquidation)
| Jurisdiction | Cayman Islands |
| Judge | Justice Margaret Ramsay-Hale |
| Judgment Date | 17 June 2022 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | Cause No.: FSD 166 of 2019 (MRHJ) |
Hon. Justice Margaret Ramsay-Hale
Cause No.: FSD 166 of 2019 (MRHJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Application for approval of provisional liquidators' fees and expenses — Berkeley Applegate Order allowing recourse to trust assets — application opposed in part by Ad Hoc Committee on grounds costs not incurred for the benefit of the trust assets and disproportionate in any event — Principles to be applied
Mr. Graeme Halkerston instructed by Mr. Rupert Bell and Mr. Niall Hanna of Walkers for the Provisional Liquidators of the Company.
Mr. Hector Robinson QC and with him, Mr. Christopher Harlow and the Mr. Laurence Aiolfi of Mourant for the Ad Hoc Committee of Clients and Creditors
Mr. Menelik Miller and Ms Renee Caudeiron of CIMA for the Petitioners
This is the decision on the application by Mr. Kenneth Krys, the Provisional Liquidator of OneTradex Limited (In Provisional Liquidation) (the “PL”) (the “Company”) by summons dated 29 April 2020 for the approval of his remuneration and expenses (more generally, costs) for the period from 18 July 2019 to 30 June 2020, including the costs incurred by the PL during the period of his appointment as a Joint Controller of the Company appointed by the Cayman Islands Monetary Authority (“CIMA”).
The background to the PL's appointment is fully rehearsed by the learned Chief Justice in his omnibus Reasons 1 for divers rulings made in this matter before it was assigned to me to hear and determine the application for payment of the PL's fees and expenses. The history of the matter is, however, relevant to the objections made by the Ad Hoc Committee (the “Committee”) and other interested parties who have corresponded independently with the Court and the PL. I have endeavoured to set out below as brief a summary of the background to this application as necessary to put the Committee's objections in context, relying for the most part on the learned Chief Justice's survey of the earlier survey of the facts.
The Company, which was incorporated in the Cayman Islands on 19 September 2012, was granted a Securities Investment Business (Full Licence) pursuant to section 6 of the then Securities Investment Business Law (2011 Revision) (“SIBL”) by CIMA on 4 December 2013 to conduct the activity of Broker/Dealer.
At the time of its licensing, the Company had informed CIMA that it was established to provide broker/dealer services to a wide range of clients. The Company's website, onetradex.com, stated that the Company was the Cayman Islands' only fully licensed broker/dealer offering online discount trading services to individual investors, traders, hedge fund managers and family offices.
The assets of the majority of the Company's clients were kept in accounts at Interactive Brokers LLC. (“IB”), a company headquartered in Greenwich, Connecticut which is regulated by a number of US regulatory agencies, including the U.S. Securities and Exchange Commission (“SEC”) and other regulatory agencies around the world. IB, as part of its broker/dealer agency business, provided direct access trade execution and clearing services to the Company's clients via an online trading platform.
Others assets were held by the Company through various other custodians, namely Fidelity Bank (Cayman) Ltd (“Fidelity”), a number of UK based firms including Beaufort Securities Limited (in Liquidation) (“Beaufort”), Jarvis Investment Management Limited (“Jarvis”), Linear Investments Limited (“Linear”), Dolfin Financial UK Limited (“Dolfin”) and Maybank Kim Eng Securities Pte. Ltd. (“Maybank”), a Singapore company.
CIMA's regulatory concerns arose from the Company's persistent failure to file audited financial statements (“AFS”) as part of its annual returns to CIMA and on 30 January 2019, CIMA took
action. By a Decision Notice served on the Company on 1 February 2019, CIMA required the Company to submit, inter alia, its AFS for the financial years 2015, 2016, 2017 and 2018Immediately following the issuance of the Notice, CIMA conducted an on-site inspection of the Company during which numerous contraventions of the Securities Investment Business Act (“SIBA”) the Securities Investment Business (Conduct of Business) Regulations 2003 (“SIB COB Regulations.”) and the Anti- Money Laundering Regulations (“AMLRs”) were identified.
On 7 March 2019, the Company's auditors advised CIMA that the Company was potentially in breach of regulation 40 of the SIB COB Regulations 2 as there was evidence to show that the Company had used a client's funds to facilitate stock loan transactions with other parties unrelated to the client whose funds were used and without the client's knowledge or approval. In these transactions, the client's funds were loaned to the other parties and stocks taken as collateral by the Company to secure the loans. The Company subsequently advised CIMA that it was unaware that the use of funds in its client account was a potential breach of the SIB COB Regulations.
Among other significant matters, the auditors noted that a potential dispute existed regarding the true legal and beneficial ownership of certain stocks held by the Company on behalf of a client. The auditors also advised that the Company lacked an adequate internal book-keeping and record keeping system which impeded the audits for the years ending 2016, 2017 and 2018.
The AFS for those years remained outstanding when CIMA decided to appoint controllers to assume control of the Company's affairs, having formed the view inter alia that the Company was carrying on business in a manner detrimental to the interests of its clients.
Mr. Kenneth Krys and Ms Angela Barkhouse of Krys Global were appointed as Joint Controllers of the Company on 18 July 2019 (the “Controllers”). On 30 July 2019, the Controllers reported on the several regulatory breaches which their investigations had uncovered to CIMA.
The PL states that it was immediately apparent to the Controllers that there had been long-term mismanagement of the Company and that basic record keeping and reconciliations as to client assets had not been kept and that the Company had failed to establish and maintain adequate records or internal controls in relation to their clients' or their own assets or liabilities. The Controllers reported to CIMA that client money had been paid into accounts which held both client and Company funds. They also reported on the improper share loan transactions uncovered
by the auditors in which a client's funds had been used without the client's knowledge or permission which potentially exposed the Company to liability of $885,471. 3Having reviewed the Company's assets and liabilities, including the potential liabilities arising from the share loan transactions, the Controllers recommended that CIMA present a petition to wind up the Company and, in conjunction with the Controllers, apply for their appointment as Joint Provisional Liquidators to insulate the Company from possible claims by clients claiming to be creditors who would seek to sell all or part of the Company's business.
On 27 September 2019, the learned Chief Justice made the Order appointing the Controllers as Joint Provisional Liquidators (“JPLs”) on the ground that it appeared from the evidence that the Company was likely to become unable to pay its debts as they fell due and that a provisional liquidation would best serve the interests of its creditors and the clients for whom the Company held assets in trust.
The Committee was subsequently formed to represent the interests of both clients and creditors.
As is usual with companies of this nature, the Company's own assets were modest by comparison to the trust assets under its control which were approximately USD85 million and insufficient to meet the costs of the Controllership and the Provisional Liquidation.
Recognising that the Company's assets would be insufficient to meet the costs of the Controllership and the Provisional Liquidation which had already been incurred or any future costs, the JPLs sought resort to the trust assets to meet their expenses on the basis that most of the work performed by the Controllers and the JPLs had been “carried out with and for the benefit of the Clients.” 4
The work done had involved unravelling the accounting and other recordkeeping systems of the Company to enable the resolution and settlement of proprietary claims and creditor claims as well as to understand the way in which clients' assets were held by the Company. Investigations had revealed that the majority of the clients' assets were held in individual accounts at IB but irregularities in relation to the assets of certain clients had been uncovered. Among those was an account at IB held by the Company on behalf of eleven clients in which the clients funds had been commingled such that IB itself had no visibility as to what assets belonged to which of the eleven
There was also an account with Linear Investments...
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