The Grand Court of the Cayman Islands has recently considered how to determine the location of the principal liquidation and associated issues of international cooperation in relation to the winding up of hedge funds registered in the Cayman Islands. The case, In the Matter of Lancelot Investors Fund Ltd (the "Company"), was heard in November 2008 with the final judgment being delivered on 23 December 2008. The ruling of Mr Justice Quin clarifies the common law position in the Cayman Islands and will be of interest to creditors and investors as well as funds and their advisers.
The Company was a regulated mutual fund pursuant to the Cayman Islands' Mutual Fund Law (MFL) and had its registered office in the Cayman Islands. It also had auditors and attorneys in the Cayman Islands. However, its directors and administrator were based in the Bahamas and its investment manager was based in the US. The Company was part of a group of 19 companies, with the other 18 companies all being based in the US. The Company's assets consisted of loan notes which had been assigned to it by another company within the group. The loan notes were governed by US law and related to loans made to a US incorporated special purpose vehicle (SPV) that formed part of the Petters' group. At the end of September 2008, it was revealed that the Petters' group had been carrying out a fraudulent scheme which had resulted in the Company's loan notes becoming worthless.
On 3 October 2008 the directors of the Company resolved to file bankruptcy proceedings in the US. The proceedings were subsequently filed on 20 October 2008 and a Chapter 7 Trustee was appointed over all 19 companies in the group. In the meantime, on 13 October 2008 an investor presented a winding up petition to the Grand Court of the Cayman Islands seeking the winding up of the Company on the just and equitable ground, on the basis that the substratum of the Company had gone. The petition was opposed by the directors of the Company (the Company itself having no assets to fund representation), by the largest independent creditor (i.e. excluding the investment manager) and by a significant number of investors.
The Issues In The Case
The petitioner contended that because the Company was domiciled in the Cayman Islands, the Cayman Islands should be the place of the principal liquidation and that investors had a legitimate expectation that this would be the case. The petitioner also contended that it was important that there should be an independent investigation subject to the supervision of the Cayman Islands' Court and that the US Trustee could not carry out this task. Those opposing the petition contended that the principal liquidation should take place in the US because the closest connection was with the US. They argued that any winding up in the Cayman Islands should be ancillary to the principal liquidation in the US. They also claimed that the winding up in the Cayman Islands should be stayed until good reason was identified for it to proceed and/or that the role of the Cayman Islands' liquidator should be restricted by the Court to avoid unnecessary costs being incurred which would ultimately reduce the return to creditors and investors.
The Court, therefore, had to consider the common law position to determine the place of the principal liquidation and the role, if any, of a Cayman Islands' liquidator in the winding up of the Company.
The following points are particularly significant:
- Court found that the place of the principal liquidation was the US, whether matters were considered from a common law perspective or determined under the UNCITRAL Model Law by looking for the centre of main interests (COMI). The Court did not elaborate on the test to be applied at common law to determine the principal liquidation but appears to have had regard to all the circumstances of the case with a view to ascertaining the most appropriate jurisdiction for the winding up of the Company.
- The Court expressly adopted and followed the English House of Lords case of In re HIH Insurance Ltd  1 WLR 852 and the Privy Council case of Cambridge Gas Transportation Corporation v Unsecured Creditors of Navigator Holdings PLC  1 AC 508. In particular, the Court appears to have accepted the general principle that bankruptcy, whether personal or corporate, should be unitary and universal (i.e. that there should be one bankruptcy proceeding in the place of the bankrupt's domicile which receives worldwide recognition and applies universally to all the bankrupt's assets). This principle was referred to by Lord Hoffman in the HIH case as the principle of modified universalism. It is clear from the Cambridge Gas case, where the insolvent company was registered in the Isle of Man, but the principal liquidation was taking place in the US, that the place of the bankrupt's domicile does not necessarily mean the place in which it is incorporated.
- Nevertheless, and notwithstanding evidence filed by the US Chapter 7 Trustee opposing the appointment of a Cayman Islands' liquidator, the Court also held that a Cayman Islands' liquidator should be appointed. Although no assets appeared to exist in the Cayman Islands and there is express provision in section 106 of the Cayman Islands' Companies Law providing for the assets of an insolvent company to vest in the Court in the absence of a liquidator being appointed, the Court concluded that it was impractical for the Court to have custody of any assets that may be found to exist. Since the Cayman Islands does not have any equivalent to the Official Receiver in the UK, the Court held that a liquidator should be appointed to take custody of any assets.
- The Court also held that a Cayman Islands' liquidator should be appointed to provide the creditors and investors of the Company with a "mouthpiece". However, the Judge was keen to stress considerations of judicial comity and to encourage the US Chapter 7 Trustee to either accept a joint appointment in the Cayman Islands with a local liquidator or to apply for recognition of the US bankruptcy proceedings in the Cayman Islands.
- The Court stayed the Cayman Islands winding up for a period of time with a view to seeing how matters progressed in the US and then re-visiting the position. The one exception to the stay was to permit the Cayman Islands' liquidator to engage with the US Chapter 7 Trustee with a view to negotiating and agreeing a protocol setting out their respective roles.
The ruling is helpful in that it clarifies the common law position to be adopted in the Cayman Islands. One key issue that still requires clarification is the test to be applied at common law to determine the place of the principal liquidation. There is also possibly an inherent conflict in the ruling between the recognition of the US as the place of the principal liquidation and the proactive approach taken in the Cayman Islands, as the place of an ancillary liquidation. It may be argued that the ancillary liquidation should only provide assistance where that assistance is required or requested by the place of the principal liquidation. However, in effect, the Court has adopted the position that it may volunteer what it regards as appropriate assistance, even if that assistance has not been requested (and, in this case, where it had been opposed by the US Chapter 7 Trustee). There is obvious potential for conflict between the different liquidations in relation to the ways in which they believe the winding up should be conducted. It remains to be seen how successful such an approach will be in practice.
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