Conundrum in cross-border insolvency tackled by Cayman Islands

A RECENT INSOLVENCY CASE in the Cayman Islands could have far-reaching ramifications to cases here in the UK bringing a more universal approach to international collapses. The decision comes just months after a UK Supreme Court slashed any hopes of creating an insolvency system that would allow practitioners to work under a universally recognised process. However, the latest ruling could see other countries pushing back against the UK.

Few companies are based within the borders of a single country’s jurisdiction. A company of a certain size is likely to have assets and/or creditors outside of the country in which it is ‘domiciled’ (that is, where it has its principal place of business) and will have contracts with and make payments to, parties in other jurisdictions.

Several countries around the world signed up to unified insolvency model known as UNCITRAL which would allow an insolvency ruling to be enforced in other countries. For example a company that is insolvent in the UK would be considered insolvent in Australia and creditors based in Australia will have to pay. However, in October last year the UK Supreme Court issued a ruling in Rubin v Eurofinance and New Cap Reinsurance Corporation v A E Grant which restricted the scope of assistance that English courts can give to insolvency practitioners appointed in proceedings outside the UK.

Prior to Rubin, a foreign judgment could be enforced in the UK where the defendant was present in that foreign jurisdiction or had submitted to that foreign jurisdiction by written agreement or turning up and defending in court, or counterclaiming in proceedings.

At the heart of Rubin was the question of whether there should be a special rule for foreign insolvency judgments such as on clawback actions which allows recognition and enforcement on a basis which is more expansive and gives effect to the principle of “universalism” (i.e. the principle that there should be a single unitary insolvency proceeding covering all assets and creditors worldwide). The UK Supreme Court decided that this wider rule for insolvency judgments was not warranted. In doing so, the majority found that an earlier case (known as Cambridge Gas), which supported a broader, more universalist approach, had been wrongly decided.

The conundrum this presented for offshore courts was whether to follow the universalist approach in Cambridge Gas or the Supreme Court, when foreign insolvency officeholders seek their assistance in insolvency matters. Now the Cayman courts have waded into the issue. In Irving H Picard and Bernard L Madoff Investment Securities v Primeo Fund the trustee of one the main Madoff companies, which was incorporated in New York and went into insolvency proceedings there, sought to recover payments made out of Primeo’s account. That Madoff company applied US law on clawback actions.

First, the practitioner obtained recognition of the US insolvency proceeding under Cayman statutory provisions and then sought to argue that under the same provisions, the Cayman court could make an order for payment of the sums sought. The Cayman court ruled that the type of assistance sought did not fall within the specified orders which it was granted power to make.

In the alternative, the Madoff trustee asked the Cayman court whether it could assist under the common law as it was expressed in Cambridge Gas. The Cayman court ruled it did have the power actively to assist the foreign officeholder (the Madoff practitioner or trustee) but that its power was limited to allowing him to bring clawback or avoidance claims which were available under Cayman law.
The Court would not apply the US law directly in the Cayman Islands. This could make a real difference, as the threshold for a successful claim under US law is understood to be more favourable to the Madoff practitioner than under Cayman law. Nevertheless, the decision and more flexible approach is likely to be welcomed by the international insolvency community.

Devi Shah is co-head of Mayer Brown International’s restructuring, bankruptcy and insolvency group in London

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