The Court of Appeal (CICA) has provided further clarification and guidance to Cayman Islands insolvency professionals on issues ranging from voidable transactions, the scope of liquidators’ powers and legal professional privilege, following the publication this month of a number of decisions that had come before the Court during the November 2016 Court sitting. Set out below is a summary of the Court’s findings in 3 of the CICA decisions which may be relevant to your day to day practice.
In the matter of Re Weavering Macro Fixed Income Fund Ltd (in Liquidation), 18 November 2016, the CICA considered in substantial detail each stage of the test to be applied in identifying voidable preferences under section 145(1) of the Companies Law (2016 Revision). It is well established that in order to make out a voidable preference claim, a liquidator must establish that (a) a payment or transfer of property took place in the six months prior to the commencement of the liquidation; (b) the company was insolvent at the time; and (c) there was an intention to prefer on creditor over other creditors. Weavering concerned an appeal against an order of the Honourable Justice Clifford declaring certain payments were invalid preference payments. In considering the solvency test under section 145(1), the CICA confirmed the applicability of the cash flow test in the Cayman Islands and clarified that this test was not confined to debts that are immediately due and payable, but also extends to debts that “will become due in the reasonably near future” and that any other conclusion would lead to artificiality. On the question of establishing an intention to prefer on the part of the company in liquidation, the CICA dismissed the suggestion that a “taint of dishonesty” (Re Kushler Ltd  1 Ch 248) is required in order for a payment or transfer to be deemed preferential. The CICA explained that the “preference” referred to in the section refers to one creditor receiving more than the amount to which they would be entitled on a pari passu basis, not necessarily a preference of a fraudulent nature. It is also irrelevant to the question of identifying a preference that the recipient of the payment was paid by mistake. The liquidator need only prove that the company intended to prefer a creditor (not that particular creditor necessarily) over others. The CICA also confirmed that common law defences, such as change of position, are not available to statutory claims under s145(1) and as such, where the elements of section 145(1) are made out, the payment is automatically avoided and must be returned.
In the matter of Primeo Fund (in Official Liquidation), 21 November 2016, the CICA distinguished between liquidators’ statutory obligations under sections 103 (letters of request) and 138 (collecting in the books and records) and their obligations as litigants before the Court. In the course of proceedings commenced by the joint official liquidators of Primeo (JOLs) seeking damages against Bank of Bermuda and HSBC, the bank defendants claimed that the JOLs had not complied with their discovery obligations sought to compel the JOLs to issue a letter of request under sections 103 and 138 of the Companies Law to a Bank in Austria. At first instance, Jones J had ordered that the JOLs issue the letter of request under s103 (letters of request) and s138 (collecting in books and records of the company) of the Companies Law, however this decision was overturned on appeal by the CICA on the basis that it amounted to an abuse of the JOL’s powers. The CICA objected to the bank defendants’ use of the JOLs’ statutory powers to seek documents from a third party in circumstances where (a) they were otherwise not entitled to third party discovery under the Grand Court Rules and (b) the statutory powers conferred on liquidators are intended to be exercised for the purpose of the liquidation, not to benefit a counterparty to litigation. The CICA also reiterated the importance of the Court not interfering with the conduct of a liquidator other than in exceptional circumstances. The CICA found that Jones J’s rationale for making the order came “nowhere near” meeting the exceptional circumstances test set out in Eddenote  2 BCLC 389
Legal Professional Privilege
In a further Primeo decision, Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) and HSBC Securities Services (Luxembourg) on 18 November 2016, the CICA considered the scope of legal professional privilege in the context of witness statements. The CICA reaffirmed the view that claims for privilege should be viewed narrowly and weighed against the importance of transparency and openness in civil proceedings. In considering when privilege is lost in respect of witness statements filed on other/related proceedings, the CICA confirmed that (a) witness statements are prima facie discoverable; (b) privilege does not apply to witness statements that have been finalised and unconditionally served (even if they weren’t relied on at trial); and (c) when privilege in a witness statement is lost, it is as against the whole world. The Court declined to go so far as to say witness statements lose their privilege before they are served.