Trustee in Bankruptcy of The Estate of R.P.J. Pelletier v O. Pelletier and Four Others

• Jurisdiction: Cayman Islands
• Judge: (Kawaley, J.)
• Judgment Date: 31 July 2020
• Court: Grand Court (Cayman Islands)

TRUSTEE IN BANKRUPTCY OF THE ESTATE OF R.P.J. PELLETIER

and

O. PELLETIER and FOUR OTHERS

(Kawaley, J.)

Grand Court, Financial Services Division (Cayman Islands)

Bankruptcy and Insolvency — transaction avoidance — setting aside prior transactions — transfers by debtor may be set aside under Bankruptcy Law (1997 Revision), s.107(1) if debtor unable to pay “all his debts” when transfers made — “all his debts” includes contingent liabilities — solvency test is balance-sheet test not cash-flow test

Held, ordering as follows:

(1) The term “all his debts” in s.107(1) of the Bankruptcy Law included both presently due debts and contingent liabilities. The preponderance of authority placed before the court pointed to a broad consensus spanning more than 100 years amongst common law lawyers and judges that the term “all his debts” meant debts and liabilities of all kinds. Modern courts primarily adopted a purposive approach to statutory construction. The most broad principled ground on which the court accepted the construction of s.107 contended for by the agents was that the contrary construction would mean that s.107 would not confer effective relief in a wide array of circumstances and would almost be rendered nugatory. Section 107 enabled a trustee to look back beyond what amounted under the Law to a six-month presumed cash-flow insolvency period to a time when the debtor might well have been able to pay his day-to-day debts as they fell due, and targeted voluntary transfers of property which might have been made to avoid non-current debts. A more minute analysis of s.107 and the limited relevant authorities supported the broad purposive view of how the section should be construed. A trustee in bankruptcy, seeking to invalidate voluntary settlements made between two and ten years before the commencement of a bankruptcy, would almost invariably be seeking to establish insolvency based on what were at the date of the settlement merely contingent or prospective claims. The solvency test was the balance-sheet test not the cash-flow test (para. 44; paras. 52–64).

(2) There was no legal basis on which it could be held that the character of the debtor’s contingent liabilities under the SPA were such that they should not be taken into account in computing his solvency when the impugned transfers were made. The debtor’s liability under the SPA should therefore be taken into account in computing his solvency at the date of the impugned transfers unless the defendants were able to show on the balanceof probabilities that, when the transfers were made, the prospects of the liability accruing were so remote that they could properly have been ignored. The value that should be assigned to a particular contingent debt was simply a matter of fact, to be determined as of the date of the settlements, and bearing in mind that the contingent creditor’s claim was not for a fixed liquidated sum. Where a contingent unliquidated sum had crystallized into a liquidated sum after the date of settlement, the starting assumption should usually be that the amount determined to be payable by a judgment or arbitration award could be used as a proxy for the settlement date valuation amount (para. 77).

(3) The defendants had not raised a triable issue on the question whether the debtor’s contingent liabilities under the SPA should not be taken into account. The contingent liabilities should be taken into account for the purposes of the plaintiff’s summary judgment application. It was obvious that, having regard to the nature of the liabilities and the debtor’s related solvency warranties under the SPA, the contingent liabilities were not so ethereal that they could properly have been ignored altogether when the various settlements were made. The debtor’s assertion that he did not believe that claims would be made against the sellers was completely at odds with objective reality. His subjective state of mind was wholly irrelevant to an objective assessment of whether the contingent liability had sufficient solidity to warrant being taken into account in an objective assessment of his insolvency (paras. 83–85).

(4) The plaintiff was entitled to summary judgment against the fifth defendant. A triable issue had not been shown to exist as to whether the debtor was able to pay all his debts at the material time (the two transfers being made in September and October 2015). The cumulative effect of the debtor’s transfers, which started with the transfer to the first defendant in June 2014 on the day after the SPA was signed) was that the gap between the sum which became due under the final award and his available assets steadily widened. The agents’ approach to the solvency calculation displayed an objective and fair approach. The court accepted in general terms the evidence that, on any sensible view of the position, the debtor was insolvent on a balance sheet basis when the two transfers (to the fourth defendant as predecessor to the fifth defendant) were made. The onus would be on the first defendant in respect of the claim against the fifth defendant at any trial to establish that the debtor was able to pay all his debts when the transfers were made. The evidence filed by the debtor was unreliable as an objective analysis of his ultimate financial position at the material time. The first defendant had not, in respect of the claim against the fifth defendant, shown that there was a fair and reasonable probability that he had a bona fide defence to the claim under s.107 in relation to which summary judgment was sought (paras. 86–93).

(5) The first defendant’s application to set aside service on her out of the jurisdiction would be refused on the grounds that (a) there was a serious issue to be tried on the merits of the plaintiff’s claim, and (b) this court hadsufficient interest to adjudicate the claim. There was a serious issue to be tried on the merits of the claim against the first defendant under s.107. There was room for serious argument both for and against the first defendant as to whether the debtor was insolvent at the time of the relevant transfer. There was a sufficient jurisdictional connection between the first defendant and this jurisdiction. The following factors pointed decisively to there being a sufficient connection between the trustee’s avoidance claim under s.107 and the Cayman Islands to enable the court to exercise the jurisdiction that section conferred: (a) although there was no apparent connection with this jurisdiction when the relevant transfer was made, it was the first of a series of voluntary transfers made or directed by the first defendant’s husband, and the other transfers were to transferees within the jurisdiction; (b) in addition to the related transfers being connected with the Cayman Islands, the first defendant took up residence here between August 2015 and June 2017, just over a year after the relevant transfer occurred in June 2014, and apparently benefited from assets which the debtor transferred to this jurisdiction (i) arguably in breach of his contractual obligations under the SPA, and (ii) in breach of s.107 of the Bankruptcy Law; (c) when the present proceedings were commenced in January 2020, the debtor and the first defendant continued to have access to residential property in the jurisdiction and were in legal terms still seemingly permanent residents of the Cayman Islands; and (d) the debtor’s bankruptcy proceedings were before this court and had been recognized by a Canadian court as a foreign main proceeding. This jurisdiction was the most natural forum to adjudicate a s.107 avoidance claim. The court accepted that the first defendant had in reality and apparently for family reasons all but severed her factual residential ties with this jurisdiction for the time being but she could not validly complain about being thwarted in any attempts by her husband, the debtor, to put the couple beyond the legal jurisdiction of this court. It was one thing to move residence; it was another to seek to sever a legal connection with a jurisdiction shortly after bankruptcy proceedings had been filed (paras. 97–98; paras. 104–108).

(6) The application by the second and third defendants for the action against them and the fifth defendant to be stayed on forum non conveniens grounds would be refused. Having found that there was a sufficient jurisdictional connection between the first defendant and this jurisdiction, it was difficult to identify a coherent basis for concluding that the Cayman Islands corporate defendants could not conveniently be sued here. They were more than merely token and hollow anchor defendants. This was a single forum case; there was presently no active competing forum; the Cayman Islands was the most natural forum; and as it was likely that no detailed evidential inquiry would be needed, the relevance of evidence being located in Canada had diminished significance (paras. 108–112).

Cases cited:

(1)Al Sabah, In re, 2004–05 CILR 373, considered.

(2)BNY Corp. Trustee Servs. Ltd. v. Eurosail-UK 2007-3BL plc, [2013] UKSC 28; [2013] 1 W.L.R. 1408; [2013] 3 All E.R. 271; [2013] BCC 397; [2013] 1 BCLC 613, considered.

(3)Cao, Re, ex p. Dixon, [1994] FCA 1263; Federal Ct., August 12th, 1994, unreported, considered.

(4)Crossley v. Ellworthy (1871), L.R. 12 Eq. 158, referred to.

(5)DD Growth Premium 2X Fund v. RMF Market Neutral Strategies (Master) Ltd., 2017 (2) CILR 739, considered.

(6)Debtor, In re a (Order in Aid No. 1 of 1979), ex p. Viscount, [1981] Ch. 384; [1980] 3 W.L.R. 758; sub nom. Re a Debtor, ex p. Viscount, [1980] 3 All E.R. 665, referred to.

(7)Densham, Re, [1975] 1 W.L.R. 1519; [1975] 3 All E.R. 726, considered.

(8)European Life Assur. Socy., In re (1869), L.R. 9 Eq. 122; 39 L.J. Ch. 324, referred to.

(9)Finney, Re (1997), 35 ATR 259, considered.

(10)Letang v. Cooper, [1965] 1 Q.B. 232; [1964] 3 W.L.R. 573; [1964] 2 All E.R. 929, considered.

(11)McBain v. Palffy, [2009] FCA 260...