The Companies Law (2013 Revision) Caledonian Securities Ltd (in Official Liquidation) (“CSL”)
| Jurisdiction | Cayman Islands |
| Judge | Hon. Anthony Smellie |
| Judgment Date | 05 May 2016 |
| Judgment citation (vLex) | [2016] CIGC J0505-5 |
| Docket Number | CAUSE NO: FSD 26 OF 2015 (ASCJ) |
| Court | Grand Court (Cayman Islands) |
| Date | 05 May 2016 |
and
The Hon. Anthony Smellie, Chief Justice
Winding up of corporate trustee — whether liquidators assume the role of trustee or act as agents of the corporate trustee — whether liquidators may charge their fees and expenses to the assets held in trust or whether obliged to recover them only from the assets of the liquidation estate of the corporate trustee — if recoverable from the trust assets then by what apportionment and in what quantum.
Mr. Robert Levy QC instructed by Mr. Rupert Bell and Mr. Niall Hanna of Walkers (with them Ms. Claire Loebell and Mr. Keiran Hutchinson of Ernst & Young (Cayman) as the Joint Official Liquidators of CSL;
Mr. Thomas Lowe QC, instructed by Ms. Grainne King of Harneys for Global Asset Allocation Fund (“Global”), Saad Investments Finance Company (NO. 5) Ltd. (“SIFCO5”) and Bristol Investment Fund Limited (“Bristol”);
Mr. David Harby of Loeb Smith for Nova Holding Group Limited (“Nova”);
Ms. Jane Hale of Appleby for the Liquidation Committee of Caledonian Bank Ltd. (in liquidation) (“the LC” and “CBL” respectively).
1. This application concerns the entitlement of the Joint Official liquidators (the “JOLs”) of CSL to fees and expenses from the assets held by CSL on trust for its customers and where such entitlement is established, the quantum of such fees and expenses.
2. The position of the JOLs is that they should be allowed to recover their fees and expenses from a reserve of a percentage of the assets which has been established by order of this Court, as explained below.
3. CBL and CSL (together “the Companies”) are ordinary resident limited liability companies, incorporated in 2007 and 2011 respectively, under the Companies Law (2013 Revision) (the “Companies Law”). CBL held a “Category A” Banking Licence in the Cayman Islands, and CSL held a full Securities Investment Business Licence to carry on business in and from the Cayman Islands.
4. The licences were revoked by the Cayman Islands Monetary Authority (“CIMA”) on 16 February 2015, following the appointment of Claire Loebell and Keiran Hutchinson of Ernst & Young as Controllers of the Companies, on 10th February 2015.
5. Ms. Loebell and Mr. Hutchinson were later appointed as the JOLs of the Companies by winding-up orders made on 23 February 2013, upon a petition presented by CIMA.
6. CSL's business was the provision of fiduciary custody and brokerage services to its customers and the JOLs have established that it provided such services to 188 customers. The assets under CSL's custody and that of the various sub-custodians engaged by it (which included CBL) are comprised of cash and securities. As such their value has fluctuated, but as at the date of the appointment of the JOLs, the value was in the order of USD573 million.
7. Accordingly, and upon receiving confirmatory legal advice as to the nature of their position, the JOLs found themselves in control of substantial assets that did not belong beneficially to the Companies (generally referred to in the evidence as “Custody Assets”), but rather were controlled by the Companies as trust assets for their customers (likewise referred to as “Custody Asset Customers”).
8. In keeping with further advice from leading counsel, the JOLs, by Summons dated 11 May 2015, (the “11 May 2015 Summons”), sought an order:
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(i) entitling them (subject to complying with all relevant anti-money-laundering regulations) to deal with Custody Assets at the direction of Custody Assets Customers; and
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(ii) directing that the Custody Assets Customers would pay the JOLs for acting in accordance with their instructions.
9. The 11 May 2015 Summons was heard on 24 June 2015, and on that day by order the JOLs were authorised:
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(i) to deal with those assets that are held to the order of CSL in its capacity as provider of custodian services to customers of CSL or are held to the order of CBL as sub-custodian of CSL, in accordance with the instructions of each Custody Asset Customer and subject to the JOLs being satisfied, in each case, that the instructing Custody Asset Customer is properly bound by the Securities Terms and Condition1;
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(ii) to establish a reserve account equal to one per cent of each Customer Asset Customer's Custody Assets (“the Reserve”); and
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(iii) whereby the JOLs would not be required to deal with any Custody Assets Customer's Custody Assets until satisfied (in the JOLs' absolute discretion), that the relevant Custody Asset Customer had paid the one per cent or authorised the JOLs to deduct it from its Custody Assets, to form part of the Reserve.
10. On the basis of the 24 June 2015 Order, distributions have been made to a large majority of Custody Assets Customers and the Reserve has been established albeit, in some instances as will be discussed below, without the authorisation of certain Custody Asset Customers.
11. By her third Affidavit filed in these proceedings, Claire Loebell explains the circumstances which are presented as justifying the position taken by the JOLs for recovery of their costs from the Reserve.
12. In summary, she attests that the Companies' record keeping was far from perfect, and that it took a great deal of time for the JOLs to acquire a complete picture of the Companies' affairs as regard Custody Asset Customers and their Custody Assets. These investigations included determining (a) the identity of all the Custody Assets Customers; (b) the extent and location of their respective Custody Assets (that is: the
identity of the sub-custodian and the specific assets held by it, if not held by CSL itself); (c) what contractual documentation the Custody Asset Customers and/or the sub-custodians had with the Companies; and (d) whether the Custody Asset Customers had completed all relevant know-your-client and other anti-money laundering documentation; and so on.13. Whereas when the 11 May 2015 Summons was issued it appeared to be the case that CSL had 175 Custody Asset Customers, it subsequently was established that in fact it had 188. For the purposes of the 11 May 2015 Summons, the JOLs segregated the Custody Asset Customers into six categories, each depending upon the contractual arrangements that the JOLs understood their members to have with CSL.
14. Pursuant to the Order of 24 June 2015, the JOLs were thus able to deal with the assets of a very large number of Custody Asset Customers. For the purposes of the present application the JOLs have broken down the general body of Custody Asset Customers into two groups, namely:
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(i) “Resolved Customers”— being those customers whose Custody Assets (save for their 1% contribution to the Reserve) have been, or will shortly be, dealt with in accordance with their instructions; and
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(ii) “Unresolved Customers”— being those customers who, for a variety of reasons, such as a refusal to contribute 1% to the Reserve, unresponsiveness or non-compliance with anti-money-laundering requirements, are not yet capable of having their Custody Assets dealt with in accordance with their instructions.
15. Whilst the hearing of the 11 May 2015 Summons determined how the JOLs could deal with Custody Assets, including the creation of the Reserve, it did not determine:
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(a) whether the JOLs should be granted an allowance for their work in relation to Custody Assets generally;
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(b) the extent of that allowance; or
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(c) how such allowance should be satisfied (that is: whether from the Reserve generally, or in some other manner).
16. These three questions now arise for resolution. The essential difficulty is that the Custody Assets are trust assets held on behalf of the Customer Asset Customers and so do not belong to the liquidation estate of CSL. Accordingly, the JOLs have no direct legal entitlement to recover their fees and expenses qua liquidators of CSL, from the Custody Assets.
17. The distinction between the costs of the JOLs incurred in relation to the liquidation of CSL and the fees and expenditure of the JOLs relative to their work done in relation to the Custody Assets generally, must therefore be strictly observed. As will become clearer below, it is in respect only of the latter that I am asked to grant allowance from the Custody Assets upon the JOLs' present application.
18. While the vast majority of the Customer Assets Customers are on notice of the JOLs' application and have raised no objection, those four appearing as represented by Mr. Lowe QC and Mr. Harby, (“the Objectors”) object on the primary basis that, as the Custody Assets are trust assets which do not belong to the liquidation estate of CSL, the JOLs have no right of recourse to them to meet their fees or expenses but are obliged simply to return them to the respective Custody Assets Customers; it being conceded that they may withhold from the Reserve, only so much as is referable to the actual costs of returning the respective Custody Assets. While the Objectors are a tiny minority in number of 188, they represent (along with the LC which also expresses concern) some 55% in value of the Custody Assets and so are concerned that they would be disproportionately affected by having to contribute 1 % of their assets to the Reserve. They assert that there is in law no basis for requiring the respective Custody Asset Customers to subsidize the costs attendant upon returning the assets of other customers or the general costs of the liquidation. That it is inequitable for those Custody Assets Customers whose legal position is straightforward to bear a comparatively higher proportion of costs, simply because they have a higher value of assets under custody than those who may have less valuable...
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