The Companies Law (2013 Revision) v the Primeo Fund (in Official Liquidation)

• Jurisdiction: Cayman Islands
• Judge: Mr. Justice Robin McMillan
• Judgment Date: 21 November 2016
• Judgment citation (vLex): [2016] CIGC J1121-2
• Date: 21 November 2016
• Docket Number: CAUSE NO. FSD 30 OF 2010 (RMJ)
• Court: Grand Court (Cayman Islands)

In the Matter of the Companies Law (2013 Revision)

and

In the Matter of the Primeo Fund (In Official Liquidation)

Before:

The Hon. Mr. Justice Robin McMillan, In Chambers

CAUSE NO. FSD 30 OF 2010 (RMJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Company Auditor not necessarily a “relevant person” for the purpose of section 103 Companies Law (2013 Revision) — Construction of section 138 of Companies Law — Object of section 138 is the getting in of Company's property — Official Liquidators' statutory powers must not be confused with the role of ordinary civil litigant.

Appearances:

Mr. Christopher Harlowe and Mr. Rupert Hamilton of Mourant for the Official Liquidators of The Primeo Fund

Mr. Barry Isaacs Q.C instructed by Mr. Paul Kennedy of Appleby for Ernst & Young Cayman

REASONS FOR JUDGMENT

Introduction

1 This was the hearing of an application made by the Joint Official Liquidators (“JOLs”) of The Primeo Fund (“Primeo”), by a Summons dated 22 April 2016, for an order, pursuant to sections 103 and/or 138 of the Companies Law (“the “Law”), compelling Ernst & Young (Cayman) (“EY Cayman”) to use its best endeavours to obtain and provide certain documents pertaining to audits of Primeo held by Ernst & Young (Luxembourg) (“EY Lux”). On 13 September 2016 the Court dismissed the Summons. The Court now sets out the reasons for the decision.

Background to the Summons

2 Primeo commenced operation as an open ended investment fund in 1994. By December 2008 the vast majority of its assets were (supposedly) held and managed by Bernard L Madoff Investment Securities Inc (“BLMIS”). Following the revelation in December 2008 that BLMIS was in fact being used to carry out a scheme of fraud, Primeo was put into liquidation on 23 January 2009.

3 EY Cayman was the auditor of Primeo from 1993 to 2008 (the “Relevant Period”). During parts of the Relevant Period certain audit fieldwork was carried out by EY Lux, although at all times the CIMA-approved statutory auditor of Primeo (as required by section 8 of the Mutual Funds Law) was EY Cayman.

4 By a letter dated 24 June 2015, the JOLs requested that EY Lux deliver up all documents in its control, possession or power which belong to Primeo or to which Primeo is entitled.

5 By a letter sent on 15 June 2015, EY Lux rejected this request, primarily on the basis that the request was too general in nature to be admissible as a matter of Luxemburg law.

6 By an Order dated 16 December 2015, the Court (Mr Justice Jones) ordered, inter alia, that:

“The Plaintiff shall request that EY Cayman conduct searches for and delivers up to the Plaintiff as soon as practicable all documents belonging to the Plaintiff or to which the Plaintiff (including its Official Liquidators) is otherwise entitled pursuant to its contractual, statutory and/or common law rights or containing or recording information belonging to the Plaintiff insofar as not already delivered up to the Plaintiff including (without limitation) the following categories of documents:

(6) the following documents held by EY Luxemburg in connection with the audit of the Plaintiff (which documents EY Cayman shall request from EY Luxemburg);

• i. contractual documents between EY Luxemburg and the Plaintiff concerning the audit services provided to the Plaintiff;

• ii. draft and final audit reports in respect of the Plaintiff;

• iii. email and other correspondence with BLMIS, Friehling & Horowitz, the directors of the Plaintiff, BA Worldwide, Pioneer, the Defendants and/or other Ernst & Young offices generated in connection with the direct or indirect provision of audit services to the Plaintiff;

• iv. copies of all audit working papers and other documents which contain information acquired by EY Luxemburg in connection with the provision of audit services to the Plaintiff, which information shall not be redacted (although such documents may be redacted to obscure other information to which the Plaintiff is not entitled); and

• v. telephone and other attendance notes concerning the provision of direct or indirect audit services to the Plaintiff, including documents relating to EY Luxemburg's field work, surveillance, monitoring or investigation of the Plaintiff, BLMIS and/or Friehling & Horowitz.”

7 By a letter sent on 23 February 2016, EY Cayman requested that EY Lux “take steps to identify, retrieve and provide us with any documents it holds in connection with the audit of [Primeo] responding to the descriptions above at paragraph 6(i)–(v)” of what was then a draft version of the Order of 16 December 2015.

8 EY Lux's response, by a letter dated 1 April 2016, disputed the JOLs' entitlement to the requested documents on a number of grounds and indicated that it would not comply with EY Cayman's request.

9 At a hearing on 5 April 2016, which was convened primarily to deal with unrelated matters, Mr Justice Jones indicated that:

“…the appropriate course is for you [Primeo] to make an application in the liquidation proceeding, put the Ernst & Young firms on notice. They may or may not choose to participate, but put them on notice, put HSBC on notice and take it from there.”

10 The Summons of 22 April 2016 and this hearing were the product of that direction and of the Order of 16 December 2015.

Primeo's Case

11 Primeo's case is that:

• (1) The Court has power to make an order under section 103 and/or section 138 of the Law;

• (2) The documents which Primeo has been directed to seek are within the possession of EY Cayman, including to the extent that it must have either an implied or express contractual right to obtain possession of documents from EY Lux;

• (3) The documents belong to Primeo and/or Primeo is entitled to the documents on the basis that they contain information which belongs to Primeo; and

• (4) The Court should therefore make an order for EY Cayman to use best endeavours to obtain and deliver up the documents.

12 It is claimed that EY Cayman's attempts to deny any relationship with EY Lux which would entitle it to recover the documents must be rejected. EY Cayman's evidence and viewpoint as to Luxembourg law are said not to be relevant for present purposes.

Section 103 of the Law

13 Section 103 of the Law provides (insofar as relevant) as follows:

103. (1) This section applies to any person who, whether resident in the Islands or elsewhere—

…

(b) is or has been a director or officer of the company;

(c) is or was a professional service provider to the company;

…

(e) not being a person falling within paragraphs (a) to (c), is or has been concerned or has taken part in the promotion, or management of the company, and such person is referred to in this section as the “relevant person”.

(2) It is the duty of every relevant person to co-operate with the official liquidator.

(3) While a company is being wound up, the official liquidator may at any time before its dissolution apply to the Court for an order —

(a) for the examination of any relevant person; or

(b) that a relevant person transfer or deliver up to the liquidator any property or documents belonging to the company.

…

14 Section 89 defines “professional service provider” for the purposes of Part V of the Law as follows:

““professional service provider” means a person who contracts to provide general managerial or administrative services to a company on an annual or continuing basis.”

15 No such particular written contract as between Primeo and EY Cayman is known to exist however in relation to general managerial or administrative services.

16 Part V of the Law, like the UK Insolvency Act 1986 (“ IA 1986”), gives a liquidator rights (or potential rights) against certain parties who have some particular connection with the company and responsibility for its affairs which go beyond those which apply in general to third parties who had some dealing with the company. It is argued that one aspect of this is the obligation to co-operate with a liquidator and the possibility of an application by a liquidator for delivery up of documents belonging to the company under section 103.

17 In ICP Strategic Credit Income Fund, 2012 (1), CILR 383, Jones J clearly found at paragraph 7 that section 103 (1) which defines “relevant person” had no application against outsiders whose only relationship with the company is that they have been in business with it or contracted to provide it with goods or services. In that case therefore the auditors KMPG LLP fell outside the statutory definition. Furthermore, in this case EY Cayman is not a professional service provider as defined by section 89 above. Likewise there is no basis before the Court from which it can be alternatively concluded that EY Cayman was in fact a director or officer of Primeo.

18 Jones J alludes at paragraph 7 to section 103 (1) as defining “relevant person” by reference to their role in the company's affairs and not by reference to the fact that they may be expected to possess information which would be of use to an official liquidator. This qualification must be borne in mind as well.

19 In relation to section 103, having considered the governing law and the facts the Court therefore dismisses the JOLs' application.

Section 138 of the Law

20 Further or in the alternative to the application under section 103, the JOLs seek delivery up of documents pursuant to section 138.

21 Sub-section 138 (1) provides as follows:

“138. (1) Where any person has in his possession any property or documents to which the company appears to be entitled, the Court may require that person to pay, transfer or deliver such property or documents to the official liquidator.”

22 Section 138 thus permits the Court to order production as against any third party, regardless of their relationship to the company, to the extent that it can be shown that it is in possession...