While local schools, some businesses and many professionals have been on a lengthy summer hiatus, the same cannot be said for the local judiciary. The Grand Court of the Cayman Islands has continued to hear and determine a wide range of matters, many of which are of particular significance to the local financial services industry. The directions and judicial guidance flowing from the courthouse pays heed to the court’s overriding objective – which is to deal with cases in a just, expeditious, and economical way – and the court has delivered important new guidance by way of practice directions and judgments about the proper conduct not only of proceedings before it, but of industry professionals generally.
Practice and procedure for winding up petitions
As those in the financial services industry well know, the filing of winding up petitions can be a contentious process, given the risk that petitions may be presented to the court improperly and the fact of their filing subsequently widely published (usually online, to great fanfare). In order to more clearly prescribe what is expected by the court at the time of filing such proceedings, the Grand Court has recently released Practice Direction No. 4 of 2017.
Noting that “the filing of a petition to wind up a company if publicized can cause irreparable harm to its reputation, even if the petition is ultimately dismissed for lack of merit,” the Practice Direction requires that, prior to filing any winding up petition, the petitioner’s attorney must apply in writing to the Grand Court Financial Services Division’s registrar to have the proceeding assigned to a judge and to fix a hearing date. A creditor’s petition must not be filed or entered upon the Register of Writs and Actions unless and until these matters have been attended to and, if the assigned judge makes an order restricting the filing or publication of the petition, it may not be entered on the register until further order of the court. Similarly, a contributory’s petition must not be published on the register until the judge has fixed a date for hearing the summons or as otherwise directed by the judge, and a winding up petition presented by the Cayman Islands Monetary Authority must be only be published on the register if the judge has so directed.
Primeo, Ponzi Schemes, and the Privy Council
The winding up of the Primeo Fund (in official liquidation), stemming from the global financial crisis of 2008 and ongoing for many years now, has continued to generate judgments of note and both the Grand Court and the Privy Council have released new decisions over recent months. Primeo, a Cayman Islands investment fund, was established and managed by Bank Austria and, to its great misfortune and ultimate demise, had invested with the now infamous multi-billion dollar Ponzi scheme known as Bernard L. Madoff Investment Securities LLC. New developments include judgments in the following proceedings arising out of the liquidation of Primeo:
- In Pearson v Primeo Fund (in Official Liquidation), the Privy Council brought to a conclusion the lengthy dispute between Hearld Fund SPC (in official liquidation) and Primeo regarding the redemption of shares. Herald, an open-ended investment fund, had invested the majority of its funds in Madoff. Primeo subsequently invested in Herald, which meant that Primeo became an indirect victim of the Madoff fraud when it was finally exposed in December 2008. Herald had accepted a number of investors’ redemption requests immediately prior to the collapse of Madoff, but had not paid out the redemption proceeds. Herald argued that all investors unpaid at the relevant date ranked as ordinary shareholders and should be paid pari passu. On behalf of the redeemed investors, Primeo argued that the amounts owed were actually simple debts and the investors should rank in the liquidation as ordinary creditors, above the unredeemed investors. The Privy Council dismissed Herald’s appeal, confirming the earlier decisions of the Cayman Islands Court of Appeal and the Grand Court to the effect that an investor who has properly redeemed its shares, but has not been paid, will be a creditor of the company in respect of its redemption proceeds. Accordingly, its claim will rank ahead of the remaining investors in the liquidation of the company, albeit behind those of “ordinary” creditors.
- In Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd (“BBCL”) and HSBC Securities Services (Luxembourg) S.A (“HSSL”) Justice Andrew Jones QC considered, and ultimately dismissed, a separate claim by Primeo for damages of approximately US$2 billion against Primeo’s custodian and administrator. Against a background of very complex facts and involved legal arguments, Primeo had alleged, among other things, that HSSL had breached its contractual duties concerning the appointment and supervision of Madoff as its sub-custodian. Primeo also alleged that BBCL had breached its obligations in connection with the maintenance of Primeo’s books and records, and in determining the NAV per share each month. Essentially, Primeo’s position was that, had BBCL and HSSL met their obligations in their respective roles, Primeo would have withdrawn its investments with Madoff and taken its business elsewhere – well before the collapse of Madoff as a Ponzi scheme and unscathed from the fallout. While such a brief summary does not do the judgment or the expansive legal arguments justice, the court ultimately found the defendants had breached their duties to Primeo in respect of their acts and omissions. However, as Primeo had failed to establish the relevant causal link between those acts and omissions and the losses it had allegedly suffered, the judge found that Primeo had suffered no relevant loss. Primeo’s claims were dismissed not only on this basis, but also because of other issues in Primeo’s case including the fact that certain of its claims were time-barred and others were barred pursuant to the rule against reflective loss (in that the Court had found Primeo was attempting to pursue claims that were more properly the claims of BBCL and HSSL). Describing Primeo as largely “the author of its own misfortune,” Justice Jones noted that the relatively high risk of fraud or error inherent in Madoff’s model must have been “manifestly obvious to all concerned” and gave general guidance as to the professional and legal standards applicable to fund directors, administrators, custodians, auditors, and investment advisors. Pending any appeal, the judgment is recommended reading for this group of professionals, particularly those who deal with abnormal or high-risk investment structures.
The evolution of fair value appraisals
In addition to the steady stream of winding up petitions that populate the court’s weekly cause list, litigation arising from mergers and acquisitions continues to be allocated significant hearing time. Via a further suite of judgments released in the last quarter, the Grand Court has been fine-tuning its guidance in respect of the proper operation of the statutory fair value appraisal regime found at section 238 of the Companies Law (2016 Revision), and the applicability of the Grand Court Rules (GCR) to that regime. Two recent examples of the continued evolution of the regime can be seen in litigation involving Qunar Cayman Islands Limited, a Cayman Islands company that had been listed on the Nasdaq but the subject of a “take private” transaction pursuant to which it was to enter into a merger with another company:
- In the matter of Qunar Cayman Islands Limited, Justice Raj Parker considered the appropriate approach to directions for the proper conduct of fair value appraisal actions before the court. Eight shareholders of Qunar forming four groups (collectively, “the dissenters”) objected to the merger and sought to have the fair value of their shares assessed pursuant to the statutory regime. In terms of the proper conduct of the appraisal process, Justice Parker ordered that one expert should be instructed jointly and severally for all four groups of dissenters, and one expert for Qunar. Further, to assist the parties’ respective experts with their valuation exercise, Qunar was ordered to give discovery by uploading all documents relevant to fair value to an electronic data room and pursuant to a list of documents in the form prescribed by the GCR. The judge did not rule out the possibility of discovery being ordered from dissenting shareholders in these types of proceedings, but made it clear that such an order would only be made in a very rare exceptional case (and not in those particular proceedings). While the fair value assessment continues before the court, this particular interlocutory judgment should in practice give rise to a consensus as to the usual order for directions applicable to the majority of such actions and ought to result in a more speedy resolution of such cases without the need for protracted argument.
- In a judgment from a related interlocutory application, Re Qunar Cayman Islands Limited Justice Ingrid Mangatal confirmed that the court has the power to award interim payments in appraisal litigation and, more specifically, to make an award in the amount of the company’s fair value offer to shareholders pursuant to section 238(8) of the Companies Law. This ruling is consistent with the approach previously adopted by Justice Charles Quin in Quihoo 360 Technology Co. Ltd and gives dissenting shareholders to a company merger assurance that, pending a determination of the fair value of a company’s shares, they have a mechanism (by virtue of GCR Order 29, Rule 12(c)) to challenge their deprivation of the price of their shares. Essentially, the judgment confirms that the court will be ready to mitigate the hardship or prejudice that could be suffered in the period between the commencement of the statutory appraisal proceedings and the ultimate determination of fair value, by making an interim payment of the merger consideration to the dissenters (effectively bringing them into the same position as the non-dissenting shareholders who will have already received the same amount of merger consideration). A “just sum” to be paid as an interim payment will be predicated on the basis of what the company has said is the fair value in the lead up to the commencement of the proceedings (being the merger consideration). The decision is an important one that will impact on other similar applications before the court, and bring more clarity to the parties’ rights and obligations in fair value proceedings.
Questioning Consent Orders
Interim payments in section 238 proceedings were also the subject of a recent judgment issued by Justice Nicholas Segal, but with a twist. In In the matter of Trina Solar Limited the court was asked to consider an application by the company to set aside a consent order it had agreed with a group of dissenting shareholders pursuant to which the company would make an interim payment of the merger consideration to them. While the consent order had been executed by the parties and approved by the judge, certain stakeholders in the company later refused to approve the payment of the agreed amounts – largely on the basis that they had become aware of the debate before the court in Qunar and in another case about the court’s jurisdiction to make interim payment orders in section 238 cases. No payment was made in the amount or by the deadline specified in the consent order, and the dissenting shareholders then filed a winding up petition against the company. The company sought from the court, among other things, a declaration that the consent order was defective or invalid, and orders striking out the winding up petition. It argued that the consent order had been made without jurisdiction because no summons or evidence had been filed in support of it as required by the GCR.
The court held that the consent order was binding on the parties when made, and was considered to be valid and in full force and effect regardless of the existence of a summons or supporting evidence. Interim payments were duly made by the company in accordance with these findings. Acknowledging this, and in a second judgment published on Aug. 25, 2017, Justice Segal confirmed that while the dissenting shareholders acted reasonably in presenting a winding-up petition after the company failed to make the payment provided for in the consent order the petition could not be pursued in the light of the fact that the interim payments had subsequently been made. However, the Court ordered that the costs of the petition, and of the application to set aside the consent order, were to be paid by the company.
A number of further cases of significance to financial services industry professionals are currently queued not only before the Financial Services Division of the court, but also the Cayman Islands Court of Appeal and the Privy Council. Industry professionals can therefore expect fresh guidance, and a continued expansion of local jurisprudence, before the year is out.