Vol 6 (2009) - Issue 4

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Indemnities and Releases – Scope and Applicability

Our article appearing in Volume 5, Issue 4 of International Corporate Rescue raised a number of issues facing liquidators of failed Cayman Islands investment funds who seek to sue the fund’s service providers in circumstances where the service providers claim the benefit of contractual indemnities and releases from the fund. The applicability of such protections and the extent to which the service providers can rely on them is a major issue that often needs to be litigated to conclusion before the underlying merits of the claim can be determined.

Two decisions of the Grand Court of the Cayman Islands have since considered the appropriate scope of such indemnities and releases and also addressed some of the issues raised in our earlier article.

Re Bristol Fund Ltd and Beacon Hill Master Ltd 3

The case of Re Bristol Fund Ltd (in official liquidation) and Beacon Hill Master Ltd (in official liquidation) concerned an appeal against the rejection of proofs of debt filed by Ernst & Young Cayman Islands (‘EYCI’) who were the Funds’ former auditors.

Following an investigation into fraudulent activity by the Funds’ investment manager by the United States Securities and Exchange Commission, liquidators were appointed over the Funds in the Cayman Islands. Various lawsuits were filed by different groups of investors in the United States against the Funds’ investment manager, administrator, EYCI and others (‘Investor Actions’). The liquidators also filed a lawsuit in the United States against the same parties (‘Liquidator Action’). The claims against EYCI in both the Liquidator Action and the Investor Actions alleged that the fraud could not have succeeded without EYCI’s reckless and negligent conduct as auditors of the Funds in ratifying and confirming the false valuations in annual audit reports, which the plaintiffs received and relied upon in making and retaining their investments.

EYCI’s defence of the Investor Actions was successful with all claims having been dismissed by the time the matter came before the Grand Court. However, the allegations pleaded in the Liquidator Action were still pending. EYCI filed proofs of debt in the Funds’ liquidations claiming actual and contingent losses incurred in respect of their defence of the Investor and Liquidator Actions. The indemnity provisions upon which EYCI sought to rely were set out in the engagement letters between EYCI and the Funds. EYCI also sought to rely on indemnities provided by the Funds’ respective Articles of Association (‘Articles’).

The engagement letters released and indemnified EYCI against any liabilities and costs suffered ‘relating to the audit services it provided to the Funds, where such losses are attributable to any fraudulent acts or omissions, misrepresentations or wilful default by management and employees’ of the Funds. EYCI claimed that its losses were ‘attributable’ to such acts of the investment manager.