RISA Conference 2016 - PowerPoint Presentation

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RISA Conference 2016 in association with South Square

Tuesday 22 November

Ritz-Carlton, Grand CaymanSlide2

WelcomeHugh Dickson Chair, RISASlide3

IntroductionAntony Zacaroli QCSouth SquareSlide4

Programme Panel 1: Restructuring - recent developments and potential reforms Coffee Panel 2: Obtaining documents abroad

Panel 3: Case study on cross-border insolvency Summing up Cocktail

ReceptionSlide5

Panel

1: Restructuring - recent developments and potential reforms

Jeremy Goldring QC, South Square (Chair)Mark Arnold QC, South SquareHugh Dickson, Grant ThorntonGuy Manning - Campbells

Michael Pearson - Fund Fiduciary Partners Slide6

Part 1: Brief facts Company X is incorporated in the Cayman Islands on 29 February 2008.The relevant Articles are in a form similar to those in Emmadart - board given broad management powers, but no express power to present a winding up petition Slide7

Facts (continued)Shares of 100 million held by two HK companies in equal proportions, who are in dispute. Shareholders appoint one nominee director each, and there is a Cayman Island independent director Company X owns, directly and indirectly, operating subsidiaries in China.The

Company appears marginally balance sheet solvent, though there are various valuations which are not clear. It has issued notes in HK, due for repayment 2020, governed by English law and payable in

England.Interest payment due on 1 December, which cannot paid.

The CI director considers

that the interests of noteholders will be best protected by a debt restructuring, including a moratorium on claims if

possible.Slide8

Part 2: What are the issues for the directors? What can they do?Practical problems facing directorsDuties of directors where cash-flow insolvency: duty to act in what they believe to be best interests of the Company taking account of creditors’ interests Options under Cayman law as currently understoodLacuna under current Cayman law – how does it impact on directors?Adverse effects of lacuna from the insolvency practitioner’s perspectiveOptions elsewhereSlide9

Part 3: Possible reforms? The need for reform.The UK experience.Options for the Cayman Islands.Alternative reforms.Slide10

Coffee breakSlide11

 Panel 2: Obtaining documents abroad - recent cases and their implications for liquidators in the Cayman Islands

Barry Isaacs QC, South Square Tony Heaver-Wren - Appleby Fraser Hughes – Conyers Dill & PearmanSlide12

OBTAINING DOCUMENTS ABROAD: EY Cayman and PioneerApplications by JOLs for the purpose of obtaining documents held by third parties abroadagainst EY Cayman for documents held by EY Luxembourgagainst Pioneer for documents held by Bank Austria and Austrian directorsApplications followed orders made by Hon Justice Jones QC on applications made by HSBCJurisdictional basis of applications

Companies Law, section 103Companies Law, section 138Common lawSlide13

OBTAINING DOCUMENTS ABROAD: JURISDICTIONAL BASISS 103(3)(b): “the official liquidator may … apply to the Court for an order … that a relevant person transfer or deliver up to the liquidator any

property or documents belonging to the company.”

S 103(7): “The Court shall have jurisdiction: … to issue a letter of request

for the purpose of seeking the assistance of a foreign court in

obtaining the evidence

of a relevant person outside the jurisdiction.”

S 138:

“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 …

transfer or deliver

such

property or documents

to the official liquidator.”

Common law/

Re China Milk Products

:

“Section 138 contains no express power for the Court to issue a letter of request to a foreign court. However, the expression “any person” must include foreigners who are in possession of property or documents outside the jurisdiction.”Slide14

OBTAINING DOCUMENTS ABROAD: RELIEF SOUGHTOrder sought from Hon Justice McMillan against EY Cayman:“that EY Cayman use its best endeavours to obtain and provide to the JOLs (specified categories of) documents held by EY Luxembourg SA in Luxembourg”Application dismissedOrder sought from Hon Justice Jones against Pioneer:

“that a letter of request be issued to the Ministry of Justice of the Republic of Austria for the purpose of compelling Bank Austria and the Austrian Directors to deliver up all hard copy and electronic documents which belong to Primeo or to which Primeo is otherwise entitled; and

that the JOLs take all such steps as are necessary or appropriate to carry the Letter of Request into effect.” Application granted and overturned on appealSlide15

OBTAINING DOCUMENTS ABROAD: EY case – Jurisdiction no jurisdiction to order EY Cayman to issue proceedings against EY Luxembourg unless EY Cayman had an enforceable right to delivery up from EY LuxembourgPrimeo’s liquidators asserted an enforceable right existed on basis of:contractual terms between the EY firmsagency principlesthe Court found that EY Cayman did not

have ‘the right to possession of any of the said documentation’, on either basisSlide16

OBTAINING DOCUMENTS ABROAD: EY case – Jurisdiction – continuedno express or implied contract between the EY firms the character of the relationship of the EY firms lacked key elements of an agency relationshipEY Cayman and EY Luxembourg each contracted directly with PrimeoSlide17

OBTAINING DOCUMENTS ABROAD: EY case – Discretionfactors relevant to discretion:improper use of liquidator powersno reasonable requirement for documentsLuxembourg Court could not order EY Luxembourg to deliver up order sought was imprecise, impractical and oppressivethe Court placed particular emphasis on the first and last of the above factorsSlide18

OBTAINING DOCUMENTS ABROAD: EY case – Discretion – improper purposeLiquidators’ purpose in application: to obtain third party discovery in the Primeo v HSBC proceedingsthe proper purpose of sections 103 and 138: necessary for the performance of liquidators’ statutory functions what may properly be given to a liquidator qua liquidator will not be given to a liquidator-litigant, qua litigantdiscovery is a different procedure, for a different purposeLiquidators using their powers to obtain discovery for use in the HSBC proceedings not a proper purposeSlide19

OBTAINING DOCUMENTS ABROAD: EY case – Order soughtorder sought by liquidators, a mandatory injunction:“that EY Cayman use its best endeavours to obtain and provide to the JOLs (specified categories of) documents held by EY Luxembourg SA in Luxembourg”in granting a mandatory injunction, the Court must be careful to see that the defendant knows exactly what he has to do as a matter of fact, so that in carrying out an order he can give proper instructionsmandatory injunctions expressed in terms of ‘all necessary steps’ or ‘best

endeavours’ fail to do so and should not be ordered: Morris v Redland Bricks Ltd [1970] AC 652, 666 GSlide20

OBTAINING DOCUMENTS ABROAD: SIGNIFICANCE OF SINGULARIS AND CHINA MILKsubmission: “the decisions in China Milk and Singularis extend [the company’]s entitlement to any documents … containing information extracted or derived from [the company]’s books and records.”

responses:information is not propertyChina Milk and

Singularis are not authority for the proposition that the company is entitled to documents containing information extracted or derived from the company’s books and recordsSlide21

OBTAINING DOCUMENTS ABROAD: INFORMATION IS NOT PROPERTYInformation cannot properly be regarded as a form of property, OBG Ltd v Allan [2008] 1 AC 1:“what is happening, in legal terms, when a court makes an order for the protection of confidential information… [and] there is no contractual tie the cause of action is the equitable jurisdiction to restrain … breach of confidence. This jurisdiction does not depend on treating confidential information as property, although it is often referred to, loosely or metaphorically, in those terms.”Information contained in the documents sought was not therefore property “belonging to [the company]” within the meaning of s 103 or

“to which [the company] appears to be entitled” within the meaning of s 138Slide22

OBTAINING DOCUMENTS ABROAD: CHINA MILK AND SINGULARIS AS AUTHORITYIn China Milk, JOLs applied under ss 103 and/or 138 for the issue of a letter of request to the Hong Kong Court to make orders that former auditor produce its working papersJOLs relied on opinion evidence as to Hong Kong law“as the information contained in these documents was derived from or provided by China Milk, it is likely that China Milk is the owner of the information in these documents and, as such, is entitled to obtain a copy of them.”

Opinion was based on doubts expressed in Singularis “about whether information which PwC acquired solely in their capacity as the company's auditors can be regarded as belonging exclusively to them simply because the documents in which they recorded that information are their working papers and as such their property.”

Opinion accepted “in the absence of any expert evidence to the contrary”; creates no precedent China Milk and

Singularis

are not authority for the proposition that company is entitled to documents containing information extracted or derived from its books and recordsSlide23

OBTAINING DOCUMENTS ABROAD: CHINA MILK AND SINGULARIS APPLY TO LIMITED INFORMATION ONLYIn Singularis, the Board proceeded on the basis that information in the auditors’ files related to property of the company which the JOLs had been unable to trace, to enable them to take possession of assets In China Milk, the claim was limited to copies of audit documents containing information derived from or provided by the company, and was sought for the purpose of investigating the whereabouts of its

assetsIf information is property capable of belonging to the company or to which the company can be entitled within ss 103 and/or 138, the information is limited to that which was provided by the company and which relates to the recovery of the company’s

assetsIn EY, the JOLs sought documents, not information, and for the purpose of making discovery of those documents

If JOLs are entitled to information, this is limited to information derived from the company’s books and records, and not other information in the documents:

Breen v Williams

(1996) 186 CLR 71 Slide24

OBTAINING DOCUMENTS ABROAD: Primeo v HSBC and Pioneer – Documents Sought in DiscoverySlide25

OBTAINING DOCUMENTS ABROAD: Primeo v HSBC and PioneerSlide26

Panel 3: Case study on cross-border insolvency Felicity Toube QC, South SquareNilani Perara–

Borrelli Walsh Jeremy Hollembeak - Kobre & Kim New YorkRachael Reynolds -

OgierSlide27

China Splash – BackgroundCayman companyLiquidators appointed in April 2013Intermediate holding company “Wanna Be” in BVI its subsidiary SplashPad in PRCWannaBe Capital Management – Bermuda manager to both China Splash and WannaBe

China Splash is listed on:HK exchangeNASDAQSlide28

China Splash – The ProblemJOLs investigation revealed SplashPad not profitableCapital raised in 2011 of $550 million through bond issuance on NASDAQChairman of SplashPad – Mr NotMe

fraudulently transferred $320 million to entities owned or controlled by himSlide29

Bond Proceeds – Fund TracingSlide30

China Splash – Work to DateMade Chapter 15 application – granted foreign main recognitionObtained a winding up order in Hong Kong recognizing their appointment of China SplashInvestigations reveal primary sources of recovery againstService providersAdvisors/IPOIdentified potential Bondholder clawbackSlide31

China Splash – PartiesAdvisorsAudits R Us – audit conducted in Cayman, Bermudian partners involved in audit sign off and US partners NeverSawIt – financial advisor to bond issuance. Received $40 million in fees.Slide32

China Splash – PartiesRecipient of Bond ProceedsBig Money Ltd (Bondholder) – Cayman company received $90 million repurchase paymentFunPass – a German company received $60 million through 35 payments to a New York bank account of Mr. Not Me’s sister in lawSlide33

China Splash – Next StepsJOLs facing challenges to their production requests of auditors and advisorsNotified of conflicting winding up proceedings commenced in Bermuda by Bondholder CAsked their legal team – Global Law Partners to provide advice with respect to the options for pursuing a global asset recovery strategy.Slide34

Summing upAntony Zacaroli QCSouth SquareSlide35

Closing remarks Hugh Dickson Chair, RISASlide36

Join us for drinks…