A key decision of the Cayman Islands’ Court of Appeal issued in November 2016 warrants special mention in this latest edition of Law Talk. In In Re Primeo Fund (in Official Liquidation) CICA 8 of 2016 (unreported, Nov. 18, 2016) the Court of Appeal ruled that using liquidators’ powers to obtain extra territorial, non-party disclosure was outside the reach of the Cayman Islands’ Companies Law (Revised). Specifically, the court held that the official liquidators of a Cayman Islands company could not use the machinery of a letter of request (based on Section 103 or 138(1) of the Companies Law) to compel a foreign bank and several of its employees to deliver up documents situated outside of the jurisdiction, for the purpose of providing discovery in Cayman Islands-based litigation to which none of them were parties. This was on the basis that liquidators’ statutory powers are not available for the benefit of a party to an action where the purpose of the liquidation will not be served. We also consider recent positive changes to the Cayman Islands’ Trusts Law and related legislation.
IN THE COURTS
In Re Primeo Fund (in Official Liquidation) CICA 8 of 2016
(unreported, 18 November 2016)
Primeo Fund, a Cayman Islands based investment fund, which was an investor in a Madoff feeder fund, entered into official liquidation in 2009, following the discovery of the infamous Bernard Madoff fraud. Thereafter, Primeo commenced proceedings in the Grand Court in order to recover damages arising out of the fraud, against Pioneer Alternative Investment Management Ltd., Bank Austria and the “Austrian directors”, who were employees of Bank Austria and also directors of Primeo, a claim that was ultimately settled. Primeo also commenced proceedings to recover damages against Bank of Bermuda (Cayman) Limited and HSBC Securities Services (Luxembourg) SA (together, the “defendants”). In the course of these later proceedings, as part of an extensive application for discovery, the defendants applied for a letter of request to be issued by the joint official liquidators of Primeo against a number of parties, including the Austrian Parties, in order to obtain documents the defendants believed were being held by them, relevant to the defendants’ case.
Grand Court ruling
At the first of two hearings on this issue, in May 2015, the JOLs submitted that the exercise was speculative and likely to be a disproportionately expensive one. Justice Andrew Jones accepted that the liquidators had no reason to apply to obtain the documents prior to the issue being raised by the defendants, as in the JOLs’ judgment the documents were not needed for the purposes of the liquidation. He remarked that the liquidators did not appear to have “tried particularly hard to obtain information,” but stated that he was not criticizing them for this . However, minded to conclude that Bank Austria were in possession of relevant documents, Justice Jones adjourned consideration of the issue to allow the defendants “a second bite of the cherry” with regard to the application for a letter of request.
Following the issuance of a fresh summons in October 2015, a second hearing took place in December 2015, at which the defendants adduced evidence of Austrian law, to the effect that the Austrian authorities would adhere to the letter of request if it was issued. Accordingly, they asked the court to order that the liquidators issue same, under the statutory powers conferred on them by Section 103(7) and Section 138 of the Companies Law and the common law.
Section 103(7) of the Companies Law provides that the Grand Court has jurisdiction “(a) to make an order under this section against a relevant person resident outside the Islands; and (b) to issue a letter of request for the purposes of seeking the assistance of a foreign court in obtaining the evidence of a relevant person outside the jurisdiction .” Section 138 provides that (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; and (2) where the official liquidator seizes or disposes of any property which he reasonably believed belonged to the company, he shall not be personally liable for any loss or damage caused to its true owner except in so far as such loss or damage is caused by his own negligence. Section 138(1) is essentially a procedural provision, which cannot give a liquidator any better right to property or documents than the company itself. Although the expression “any person” must include foreigners, Section 138 contains no express power for the court to issue a letter of request to a foreign court.
Primeo submitted that it was not permissible to use Sections 103 and 138, purely so that documents could be handed over to the defendants, where there was no point in the powers being exercised for the purpose of securing the fulfilment of the JOLs statutory powers in the liquidation. However, Justice Jones directed that an application to the court for a letter of request should be issued by the JOLs, on the basis that it was inherently likely that the Austrian directors’ files were in the possession of Bank Austria, and that it was inherently unlikely that the Austrian directors had themselves retained the files. He did not state his conclusions on the use of the Companies Law for this purpose and did not state what test he had applied to the conduct of the JOLs, nor the reasons why he had exercised his discretion to make the order.
Primeo did not seek leave to appeal any part of the order. However, after receiving notice from Pioneer that it was claiming that the JOLs were precluded from seeking the letter of request by a settlement agreement between Primeo, Pioneer and the Austrian Parties, Primeo sought a hearing to determine the correct construction of the settlement agreement.
At the hearing on April 5, 2016, Pioneer argued that, in addition to the effect of the settlement agreement, it would be an abuse of the jurisdiction under the Companies Law to direct the liquidators to issue a letter of request in the circumstances. However, Justice Jones distinguished the facts of the instant matter from the case law cited to him, where liquidators had used their statutory powers not for the purposes of a liquidation, but for obtaining an advantage over opponents in actual or contemplated litigation, and made an order that a letter of request should be issued to the Austrian Federal Ministry. The order also required the JOLs to “take all such steps as are necessary or appropriate to carry the Letter of Request into effect”.
Court of Appeal ruling
The Court of Appeal was critical of Justice Jones’s ruling in several respects. Firstly, it found that Justice Jones did not consider whether there was any risk that Bank Austria might be brought into the defendant’s damages claim, by the use of third party contribution proceedings, or whether they could otherwise be made a party to action taken by the defendants. Secondly, that although the judge had in mind the principle that the JOLs must exercise their statutory powers for the purposes for which the powers had been conferred by the Companies Law, and had concluded that collecting in the company’s books and records was a proper exercise of such powers (and therefore they could be directed to issue a letter of request), his approach neglected to consider the undisputed evidence from the JOLs that, whilst a proper exercise, it was not a necessary exercise for that purpose, as there were no grounds for believing the Austrian parties held documents which were needed for the liquidation. Thirdly, deeming that the liquidators had not taken sufficient or appropriate steps to obtain the relevant documents, came nowhere near meeting the test for interfering with the exercise of a liquidator’s discretionary powers laid down in Edennote. Fourth, in finding that it was not an abuse for the JOLs to use the machinery of a letter of request for the purposes of complying with disclosure obligations, Justice Jones had conflated the JOL’s statutory duties with the obligations which Primeo had to discharge under the Grand Court Rules (Revised) with regard to discovery. Fifth, Justice Jones erred by failing to give sufficient weight to the liquidators’ opinion that the exercise had nothing to do with the liquidation and would be speculative and expensive. Finally, the judge failed to take account of the likelihood that there would be re-litigation on the true effect of the settlement agreement. For all these reasons, the appeal was allowed and the order directing the JOLs to issue a letter of request was set aside.
Court of Appeal’s conclusions
Official liquidators do not by reason of their office, when conducting litigation in the name of a company, have greater obligations under the GCR than any other litigant has to discharge. To require this would make the discovery process extraordinarily burdensome and expensive for liquidators of insolvent companies and leave liquidators with a duty to assist an opponent in adversarial litigation by seeking letters of request against non-parties who may be in possession of documents located outside of the jurisdiction. Section 103 of the Companies Law must not be used for giving a litigant, who happens to be an office holder, special advantages in ordinary litigation. Further, an abuse can arise when a statutory power conferred for certain purposes, is deliberately used for purposes beyond the contemplation of the statute and, this holds equally true with respect to third parties. Ultimately, liquidators’ statutory powers are not available for the benefit of a third party to an action to enforce for its benefit, where the purpose of the liquidation will not be served.
IMPROVEMENTS TO THE CAYMAN ISLANDS TRUSTS LAW
On Oct. 24, 2016, the Trusts (Amendment) Law, 2016 and the Property (Miscellaneous Provisions) (Amendment) Law, 2016 came into force in the Cayman Islands and represent welcome enhancements to the trusts law in this jurisdiction.
The Trusts (Amendment) Law, 2016
The key amendments, which, in the main, modernise and correct certain deficiencies and technical issues in the Trusts Law (2011 Revision) (the “Trusts Law”), can be summarized as follows:
- Section 4(1) of the Trusts Law, which inter alia allowed for the replacement of a trustee who has left the Cayman Islands for more than 12 months, has been amended. Many Cayman Islands trusts are administered by non-resident trustees, so this amendment reflects the modern Cayman Islands’ trust industry.
- An amendment to the Trusts Law in 1998 created a conflicting transitional provision with regard to trusts created on, or after, May 11, 1998, relating to the discharge of a retiring trustee. Section 6(c) has been amended to specifically refer to trusts created on, or after, May 11, 1998, in order to tidy up and provide certainty in respect of this issue, which will be a significant improvement to the legislation for trust practitioners.
- Section 8 of the Trusts Law has been amended to exempt the requirement that, in order for a retiring trustee to be discharged, at least two individuals or a trust corporation must remain as trustee(s), if only one trustee was originally appointed or if a contrary intention is expressed in the trust deed.
Trustees of STAR Trusts
- Pursuant to section 105(2) of the Trusts Law, the trustee of a STAR trust must be, or include, a Cayman Islands licensed trust company or private trust company. This provision has been amended to allow for controlled subsidiaries of Cayman Islands licensed trust companies to act as the trustee of a STAR trust.
- Section 14 of the Trusts Law has been amended to provide that a settlor may grant or reserve the power to appoint either income or capital, or both, from the trust. Previously, the Trusts Law was unclear as to whether or not a settlor was able to appoint income or capital. This will apply to all trusts whenever created.
Other Trustee Powers
- Section 25(1) of the Trusts Law has been amended to make it clear that trustees may insure trust property against any adverse event, not only against loss or damage by fire.
- Pursuant to the new section 23A inserted in the Trusts Law, the common law rule requiring a trustee to appoint at least something to every beneficial object of a discretionary power has been removed.
- Section 71 of the Trusts Law has been amended to clarify that a charitable trust may benefit the public or a section of the public outside of the Cayman Islands, wholly as well as just partly.
The Property (Miscellaneous Provisions)
(Amendment) Law, 2016
This law amends the Property (Miscellaneous Provisions) Law (2011 Revision), in summary, as follows:
- To permit agents lawfully appointed in writing to execute legal assignments of things in action for their principals.
- To require assignments of equitable interests to be made in writing or by will.
- To provide for the construction and/or interpretation of commonly understood terms in deeds, contracts, wills, orders and other instruments.
- To allow the holder of a trust power to disclaim such power by deed.
- To confirm the valid exercise of powers by deed or another type of non-testamentary instrument (executed as a deed in the ordinary way) even if the instrument creating the power expressly requires additional or other form of execution.
These important improvements and modernisation of the Cayman Islands Trusts Law, and related laws, ensures that the Cayman Islands will continue to remain an attractive and leading jurisdiction for commercial and private client structures.
In the next edition of Law Talk we consider the Monetary Authority (Amendment) Bill 2016 which seeks to amend the Monetary Authority Law (Revised) to empower the Cayman Islands Monetary Authority to impose administrative fines for breaches of certain provisions of regulatory laws in the Cayman Islands, the money laundering regulations’ or the Monetary Authority Law itself. We will also review the Statement of Guidance on Professional Indemnity insurance coverage for Trust Companies, Insurance Brokers, Insurance Managers, Insurance Agents, Mutual Fund Administrators, Securities Investment Businesses, Company Managers and Corporate and Professional Directors, recently issued by CIMA.