The Companies Act (2021 Revision) and Income Collecting 1–3 Months T-Bills Mutual Fund (in Official Liquidation)

• Jurisdiction: Cayman Islands
• Judge: David Doyle
• Judgment Date: 04 February 2022
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO: FSD 188 OF 2021 (DDJ)

In the Matter of the Companies Act (2021 Revision)

And in the Matter of Income Collecting 1–3 Months T-Bills Mutual Fund (In Official Liquidation)

Before:

The Hon. Justice David Doyle

CAUSE NO: FSD 188 OF 2021 (DDJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Court's sanction for Joint Official Liquidators to enter into a compromise order with the Securities and Exchange Commission of the United States of America and pay an interim dividend to creditors

Appearances:

Mr Guy Dilliway-Parry and Mr James Dixon of Priestleys Attomeys-at-Law for the Joint Official Liquidators of the Company

Introduction

1 There is before the Court an application (by way of summons dated 22 December 2021) by Keiran Hutchison and Igal Wizman of EY Cayman Ltd and EY Bahamas Ltd respectively acting in their capacity as the Joint Official Liquidators (“JOLs”) of Income Collecting 1–3 Months T-Bills Mutual Fund (in Official Liquidation) (the “Company”) for an order that sanction is given for them:

• (1) to enter into a compromise and consent order with the Securities and Exchange Commission of the United States of America (“SEC”) dated 13 January 2022;

• (2) to enter into an agreement with Mosaic Financial Limited (“Mosaic”) dated 6 January 2022; and

• (3) to pay an interim dividend to such creditors whose proofs of debt, having been lodged with the JOLs by 24 December 2021 in accordance with the interim dividend notice, have been admitted by the JOLs or will be admitted by the JOLs in due course and a direction that they pay a dividend to Mosaic in a specified minimum sum.

2 I would like at the outset of this judgment to acknowledge the hard and skilled work of the JOLs and their attorneys in the Cayman Islands and in the United States of America in expertly progressing matters to this stage in a relatively short space of time, noting that the Supervision Order was made on 11 October 2021. The cooperation and sensible agreement of the SEC should also be acknowledged. There were obvious tensions in this case and they have been very well dealt with in the best interests of the creditors and other stakeholders of the Company. It is right that the considerable amount of cooperation and skilled work put into this case by the relevant entities and their attorneys is acknowledged.

Documentation and submissions considered

3 I record that I have considered the contents of the hearing bundle. I have also considered the skeleton argument of the Company and the authorities bundle. I have considered the well-focused oral submissions so eloquently and persuasively put before the Court by Mr Guy Dilliway-Parry for the Company. I am most grateful to him for his valuable assistance to the Court in respect of this fascinating case.

4 I should also record that at 1.58 pm this afternoon, 32 minutes before the hearing was due to begin, correspondence between Priestleys who act for JOLs and Broadhurst (who act for the former joint voluntary liquidators) dated 20–21 January 2022 was brought to my attention and I have considered those letters. I take into account the position of the former joint voluntary liquidators of the Company who are obviously keen to secure their fees. I note that they are “generally supportive of an agreement being reached with the SEC” and a dividend being declared and paid subject to an apparent priority issue which is not before the Court today. They say they are “generally supportive of the application”. At paragraph 11 of Broadhurst's letter dated 21 January 2022 they state that “we respectively submit that it is appropriate for a direction to be given from the Court that, in the event the JOL's application is granted, if the JOLs propose to make any payments to themselves or their service providers in advance of the fees and expenses of the former JVLs they will, prior to doing so, make a corresponding application to the Court.” I am not minded to make such a direction. I consider it unnecessary. The JOLs are well aware of their obligations and will no doubt make any appropriate and necessary applications, if any, at the appropriate time as they see fit.

The functions of the JOLs and the SEC

5 One of the functions of an official liquidator is to collect, realise and distribute the assets of the company to its creditors and if there is a surplus to the persons entitled to it (see section 110 (1) of the Companies Act (2021 Revision) (the “ Companies Act”)).

6 One of the functions of the SEC is to exercise its right to seek and obtain disgorgement, i.e. a judgment ordering a defendant to return funds and assets obtained in connection with fraud or other violations of the securities law. See the US Supreme Court case of Liu v. SEC, 140 S, Ct. 1936 (2020), 22 June 2020 opinion delivered by Justice Sotomayor, who I had the privilege and pleasure of meeting in person at her chambers in Washington after her appointment as a Supreme Court Justice.

7 In Liu, the Supreme Court considered the SEC's right to seek and obtain disgorgement as equitable relief in civil enforcement proceedings. In Liu the Supreme Court held that it is permissible for the SEC to seek and obtain disgorgement provided, amongst other things, it is awarded for the benefit of victims of the defendant's misconduct. Justice Sotomayor at page 7 of the report refers to the way in which, in the past, the American courts have occasionally awarded disgorgement in ways that test the bounds of equity “by ordering the proceeds of fraud to be deposited in Treasury funds instead of dispersing them to victims”. Justice Sotomayor felt that the SEC's disgorgement remedy “is in considerable tension with equity practices”. Justice Sotomayor felt that the lower courts were “well equipped to evaluate the feasibility of returning funds to victims of fraud”. Justice Sotomayor stated: “The general nature of the profits remedy generally requires the SEC to return a defendant's gains to wronged investors for their benefit” adding “the SEC's equitable profit-based remedy must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains”. Justice Thomas dissented holding that: “Disgorgement is not a traditional form of equitable relief” adding that “The majority's treatment of disgorgement as an equitable remedy threatens great mischief”. Justice Thomas, in the minority, would have reversed “for the straightforward reason that disgorgement is not equitable relief”.

8 Warren E. Gluck, a US attorney, in his helpful and well-written affirmation, affirmed on 15 January 2022 at New York, New York, at paragraph 16 states: “Recent case law has provided that Liu may be satisfied by establishing a mechanism for identifying harmed investors and returning funds directly to them, such as by use of a “Fair Fund” in which the SEC acts as “de facto trustee” of the funds for the ultimate distribution directly to investor victims. See SEC v Blackburn No. 20-30464 (5 ^th Cir. Oct. 12, 2021).”

9 On the face of it there is a clear tension between the obligation of the JOLs to collect in assets and the SEC's judicial mandate to act as a “de facto trustee”. They do, however, as is rightly...