The Privy Council denies recovery of internal costs incurred in preparation for compliance with Bermuda Supreme Court disclosure orders.
The Privy Council (Lord Neuberger, Lord Mance, Lord Sumption and Lord Collins; Lord Clarke dissenting) has recently handed down a judgment, on 17 November 2016, in long-running insolvency litigation between PricewaterhouseCoopers (PwC) and Saad Investments Company Limited (SICL) and between PwC and Singularis Holdings Ltd (SHL).
The Privy Council's recent decision concerns PwC's claim to recover $250,000 of internal costs allegedly incurred in preparing for compliance with disclosure orders that were made by the Supreme Court of Bermuda, but ultimately discharged by the Privy Council on appeal.
Background
The underlying litigation concerned challenges by PwC, a Bermuda exempted partnership, to orders made by the Bermuda Supreme Court on 4 March 2013 (and upheld inter partes on 15 April 2013) requiring PwC to produce documents relating to two Cayman incorporated companies, SICL and SHL (the "Companies"), both in official liquidation in Cayman. In the case of SICL, the disclosure order by the Bermuda Court was made in conjunction with an ancillary winding up order pursuant to section 195 of the Bermuda Companies Act 1981 (the "Act"), despite the fact that SICL was not engaged in or carrying on any trade or business in Bermuda. In the case of SHL, the production order had been made as a matter of cross-border insolvency assistance and judicial comity under the common law, "by analogy with the statutory powers" under section 195.
PwC applied inter partes to discharge those orders in the Supreme Court but Kawaley CJ refused the application. On hearing submissions regarding the timeframe for compliance, however, Kawaley CJ granted PwC an extension of time to comply with the orders (but not on the basis of any appeal) ultimately requiring compliance by 1 August 2013. The Court declined to require the Companies or their foreign Liquidators to give any undertakings regarding PwC's costs of compliance.
PwC applied to the Court of Appeal for Bermuda seeking to have the disclosure orders set aside and in its judgment of 18 November 2013, the Bermuda Court of Appeal set aside Kawaley CJ's production order in the case of SHL but upheld the disclosure order in respect of SICL on the basis that PwC had only appealed the production order and the Court could not impeach the winding up order in the context of an application made under it.
In the case of SICL, PwC applied to the Privy Council to have the production order set aside. The Privy Council upheld the appeal advising that the Bermuda Court had no jurisdiction to wind up a company incorporated outside Bermuda and this therefore rendered ineffective the production order made under its winding up jurisdiction (see [2014] UKPC 35). In the case of SHL, in an appeal brought by SHL, the Board upheld the decision of the Bermuda Court of Appeal setting aside the production order (see [2014] UKPC 36). In the latter case, the Privy Council briefly discussed compliance costs (at paragraphs 25 and 121, per Lord Sumption and Lord Mance speaking obiter) but it did not, at that stage, formally rule on them.
The Privy Council's recent decision
The Privy Council's recent decision dealt with the following issues as to the costs incurred by PwC in preparation for compliance with the production orders, which were ultimately discharged:
- whether the Supreme Court should have extracted an undertaking from the Companies at the inter partes stage against the possibility of a successful appeal by PwC; and
- in the absence of an express undertaking, whether an undertaking is to be implied between the parties.
The Privy Council, in distinguishing compliance with an order from compliance with an interlocutory injunction, held that the Judge was not obliged to extract a costs undertaking from the Companies' foreign liquidators at the inter partes stage. Further, the Board found that no undertaking could be implied because of the voluntary nature of undertakings and the fact that the foreign liquidators had made clear that they were not willing to give such undertakings.
Lord Mance stated, "The remedy in respect of such orders was to appeal, and, if (as here) compliance with the orders would involve preparatory costs before any appeal could be determined, to apply for a further extension of the time for compliance or for a stay of execution pending appeal. ... Had [PwC] applied for either, it would have been open to the court to order an extension and a stay unless SHL and SICL or the Liquidators gave a cross-undertaking to cover costs incurred in preparing to comply with the orders, if the orders were set aside on appeal. SHL, SICL and the Liquidators would then have been able to exercise an informed choice whether or not to give any cross-undertaking that might be required of them to obtain the disclosure orders they were seeking."
In oral submissions, PwC pursued two further arguments.
First, that the absence of any provision for PwC's costs of compliance rendered the disclosure orders defective on the basis of Norwich Pharmacal Co v Comrs of Customs and Excise [1974] AC 133.
Second, PwC sought to rely upon the insolvency principles in In re Aveling Barford [1989] 1 WLR 360 and In re Bank of Credit and Commerce International SA [1997] BCC 561. These cases stand for the proposition that a third party ordered to assist with producing information in the public interest (eg in insolvency or receivership cases) is not presumed to be entitled to compliance costs, but that they may seek costs following full compliance and the court may exercise its discretion to award them.
The Privy Council rejected both arguments.
First, the Privy Council distinguished the Norwich Pharmacal line of authorities as there was no tortious claim involved.
Second, the majority were not convinced that the Privy Council had strict jurisdiction to make an order by reference to section 195 in circumstances where there was no jurisdiction to make a winding-up order in the first place and thus the disclosure order under section 195 had been discharged. Furthermore, in the authorities placed before the Court, the consideration of compliance costs was to be deferred until after compliance had taken place. Here, however, no such compliance ever took place because PwC ceased the discovery process before releasing any documents.
Dissenting opinion
Lord Clarke, in his dissent, agreed with the majority on all matters except the last and stated that he would have made an order by reference to section 195 of the Act on the basis that PwC had acted reasonably in preparing to comply with the orders and should not be deprived of the costs merely because the orders were subsequently set aside on appeal.
In addition, Lord Clarke commented on the majority's statement that PwC should have sought protection in respect of preparatory costs, stating that although a desirable course of conduct, it is not compulsory. In his view, the correct approach would have been for Kawaley CJ or the Court of Appeal to "acknowledge the possibility of recovering compliance costs and state that it would be open to PwC to make an application for such costs at an "appropriate time" which in In re Aveling Barford was when compliance had been achieved, and in this case would be once the orders were discharged."
Practical implications
The Privy Council's recent decision is interesting and important for a number of different reasons.
Firstly, there are an increasing number of circumstances in which Bermuda and offshore entities are being ordered to produce documents under compulsion, whether on the request of foreign Courts, foreign liquidators, or foreign regulators or tax authorities. The costs of compliance can be very considerable, and it is always important to identify, at the outset, who is going to pay such costs, and on what basis, before the disclosure exercise is conducted.
There can be circumstances in which professional indemnity insurers may be called upon to provide coverage to insureds faced with third party disclosure orders for the costs of compliance, such as in regulatory investigations or insolvency proceedings. Such costs of compliance, however, are unlikely to be caught by most PI policies without the inclusion of suitably worded extensions, absent an actual claim being made against the disclosing party.
In light of the Privy Council's decision, any party facing a document production order would be well advised to seek undertakings or orders for payment of compliance costs at the earliest possible opportunity, rather than simply seeking costs of compliance generally, after the event, or on appeal.
Secondly, from a local Bermuda legal perspective, the Privy Council decision offers an informative discussion and guidance on the law and practice of cross-undertakings in the context of interlocutory injunction applications. It also raises the question as to whether or not a foreign liquidator should be recognized or assisted by the Supreme Court of Bermuda, as a matter of common law and local public policy, if such a liquidator refuses to provide appropriate undertakings, or security in support of such undertakings, within the jurisdiction of Bermuda.
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