Cayman Islands: Court Of Appeal Overrules Unprecedented Attempt To Introduce Non-Party Extra Territorial Discovery

Last Updated: 22 November 2016
Article by Paul Smith, Ben Hobden and Sarah Lewis

In a Judgment handed down on 18 November 2016, the Cayman Islands 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 (2013 Revision) (the "Companies Law"). Specifically, that the official liquidators ("JOLs") could not use the machinery of a letter of request based on Section 103 and/or 138(1) of the Companies Law to compel a foreign bank and several of its employees to deliver up documents situated out of the jurisdiction for the purpose of providing discovery in Cayman litigation to which none of them are parties, as 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.

Background

Primeo entered into official liquidation in 2009 following the discovery of the 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' (being employees of the Bank and directors of Primeo) (together the "Austrian Parties"), 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 (the "Defendants"). In the course of these proceedings, as part of an extensive application for discovery, the Defendants applied for a Letter of Request to be issued by the JOLs against a number of parties, including the Austrian Parties, in order to obtain documents the Defendants believed were being held by the Austrian Parties.

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 exercise. Jones J accepted that the JOLs 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 liquidation. He remarked that the JOLs did not appear to have "tried particularly hard to obtain information", but stated that he was not criticising the JOLs. The Court of Appeal concluded that this lack of criticism is significant, as it is well established that the relevant test to be applied before interfering with the conduct of a liquidator is to ask whether he has "done something so utterly unreasonable and absurd that no reasonable man would have done it" (Edennote Ltd. (1996) 2 BCLC 389).

However, minded to conclude that Bank Austria were in possession of relevant documents, Jones J adjourned consideration of the issue to allow the Defendants 'a second bite of the cherry' with regard to the Letter of Request.

Following the issuing of a fresh summons, a second hearing took place in December 2015, at which the Defendants adduced evidence of Austrian law that the Austrian authorities would adhere to the Letter of Request which they asked the Court to order the JOLs to issue under the statutory powers conferred by Section 103(7) and Section 138 of the Companies Law and common law.

There is a jurisdiction provision under Section 103(7) of the Companies Law to make an order that a Letter of Request be issued. Section 103(7) 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." The Court of Appeal made it clear that the Court should not exercise its jurisdiction unless satisfied that the factual basis for its exercise has been established. 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 losses or damage is caused by his own negligence. Essentially, Section 138(1) is 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, and where there was no point in the powers being exercised for the purpose of securing the fulfilment of the JOLs statutory powers. Jones J 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 Directors had themselves retained the files. He did not state his conclusions on the use of the Companies Law 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 but, after being given notice that Pioneer was maintaining that the liquidators were precluded by the settlement agreement between Primeo, Pioneer and the Austrian Parties ("Settlement Agreement"), sought a hearing to determine the correct construction of the Settlement Agreement. At the hearing on 5 April 2016, Pioneer argued in addition to the effect of the Settlement Agreement, that it would be an abuse of the jurisdiction under the Companies Law to direct the JOLs to issue a Letter of Request. Jones J was not with Pioneer on this, distinguishing 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 Jones J's ruling in several respects. First, that Jones J did not consider whether there was any risk that Bank Austria might be brought into the damages claim by the Defendants by the use of third party contribution proceedings or whether they could otherwise be made a party to action taken by the Defendants. Second, 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 the statutory powers of the JOLs and therefore could be directed to issue a Letter of Request, his approach neglected to consider that the undisputed evidence from the JOLs was that whilst a proper exercise, it was not a necessary exercise for that purpose as there was no ground for believing the Austrian parties held documents which were necessary. Third, deeming the JOLs 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 the purposes of complying with disclosure obligations, Jones J had conflated the JOLs statutory duties with the obligations which Primeo had to discharge under the GCR with regard to discovery. Fifth, Jones J erred by failing to give sufficient weight to the JOLs' 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 be 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 do so 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, on the basis that an abuse can arise when a statutory power conferred for certain purposes is deliberately used for purposes beyond the contemplation of the statute, this holds equally true with respect to other parties. Ultimately, liquidators' statutory powers are not available for the benefit of a defendant to an action by a liquidator to enforce for the defendant's benefit where the purpose of the liquidation will not be served.

Paul Smith and Ben Hobden of Conyers, instructed David Allison QC on behalf of the successful Appellant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Paul Smith
Ben Hobden
Sarah Lewis
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions