Vol 10 (2013) - Issue 4

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Powers of Foreign Officeholders: Guidance from the Cayman Islands Grand Court

Introduction
In the recent case of Irving H. Picard and Bernard L. Madoff Investment Securities LLC (In Securities Investor Protection Act Liquidation) v Primeo Fund (in Official Liquidation) the Cayman Islands Grand Court has handed down a ruling giving detailed analysis of the powers of officeholders, who have been appointed in foreign insolvency proceedings and recognised in the Cayman Islands, to pursue transaction avoidance claims in this jurisdiction. The circumstances surrounding the decision, and the decision itself, serve to emphasise the differences in Cayman Islands insolvency procedure from the UNCITRAL regime adopted in many leading onshore jurisdictions, including the United States and the United Kingdom. The Picard decision is also noteworthy for the identification of lacunae in two sections of the Companies Law; and for its commentary on the well-known cases of Cambridge Gas and Rubin.

The decision
Mr Irving H. Picard ('Picard'), held (and continues to hold) the office of trustee of Bernard L. Madoff Investment Securities LLC ('BLMIS'). BLMIS was and is the subject of insolvency proceedings in New York. Its former owner and controller Mr Bernard Madoff has admitted that he used BLMIS to operate a Ponzi scheme and it was accepted that at all relevant times BLMIS’s investor advisory business was being carried on fraudulently. BLMIS was incorporated in New York, and had as its principal place of business New York City. Certain Cayman Islands investment funds including the Defendant ('Primeo') placed funds with BLMIS for investment prior to the disclosure of BLMIS’s fraudulent practices, and this was BLMIS’s only connection to the Cayman Islands. Primeo invested in BLMIS both directly and indirectly through two further investment funds.
Significantly, the Judge commented that prima facie there were no grounds for BLMIS to be wound up in the Cayman Islands under section 91(d) of the Companies Law (2012 Revision) (the 'Law'). Although not explicit in the judgment, such commentary suggests a view that potential transaction avoidance claims, which arise in the Cayman Islands upon the entry of a company into insolvency proceedings overseas, do not constitute 'property located in the Cayman Islands' for the purposes of section 91(d).
Picard successfully obtained a recognition order in the Cayman Islands pursuant to section 241(1)(a) of the Law. He then brought avoidance claims against Primeo in respect of certain direct and indirect withdrawals made from Primeo’s account with BLMIS prior to the commencement of BLMIS’s liquidation in New York. The matters before the Court in the present proceedings related to various preliminary issues. In particular the Court was asked to determine whether Picard may assert avoidance claims in the Cayman Islands either under section 241 of the Law or at common law. If such claims may be brought, the supplemental question arose as to whether such claims may be based upon the application of substantive United States law, or in accordance with Cayman Islands law (i.e. section 145 of the Law or its predecessor, section 168 of the 2007 Revision of the Companies Law). The Judge noted that while both US law and Cayman law have at heart the same underlying policy objective of ensuring the fair and equal treatment of creditors, the provisions of the respective laws are materially different.
The Judge held that avoidance claims may only be pursued at common law, not under section 241. The provisions of section 241(1)(e) permitting the Court to make orders ancillary to a foreign bankruptcy proceeding for the purposes of ordering the turnover to a foreign representative of any property belonging to a debtor do not encompass transaction avoidance claims. Avoidance claims cannot be seen as 'belonging to the debtor' (in this case, BLMIS) as they did not exist prior to the commencement of the United States insolvency proceedings. Instead they can only be seen as property of the bankruptcy estate, and such claims fall outside the ambit of section 241(1)(e).