A Sufficient Connection: Cayman Islands Recognition of Foreign-Appointed Receivers

As a receiver or counsel to a receiver, it is important to be aware of your potential courses of action should you be required to locate/secure assets or seek the disclosure of documentation from a party in a foreign jurisdiction such as the Cayman Islands.

The Grand Court of the Cayman Islands has statutory and common law authority to provide assistance to parties and courts involved in foreign bankruptcy/insolvency proceedings.

In a recently released judgment, In the Matter of Silk Road Funds Ltd.,[1] which was embargoed from Feb. 8, 2018, until May 30, 2019, Chief Justice Anthony Smellie (“Smellie CJ”) clarified the appropriate approach for foreign-appointed receivers when seeking recognition in the Cayman Islands.

This case involved an attempt by the Supreme Court of Bermuda court-appointed joint receivers of a Bermudian segregated accounts company, Silk Road M3 Fund (“M3 Fund”), to seek recognition of the receivership within the Cayman Islands for the primary purpose of obtaining permission to bring an action for Norwich Pharmacal[2] relief against the Joint Official Liquidators of Caledonian Bank Limited and Caledonian Securities Limited.

The receivers argued that the available routes to recognition in the Cayman Islands were through the common law and the principle of “modified universalism,” but the only correct route for the receivers was through modified universalism.

Statutory Recognition

The Grand Court accepted the receivers’ position that statutory recognition pursuant to Part XVII – International Co-operation of the Companies Law (2016 Revision) [now 2018 Revision][3] is not the appropriate route for the receivers to obtain recognition of their receivership.

Obtaining recognition of a foreign bankruptcy proceeding pursuant to the Companies Law requires a foreign representative to make an application to the Grand Court for an order ancillary to the foreign bankruptcy proceedings.

The Companies Law defines “foreign representative” as a trustee, liquidator or other official appointed in respect of a debtor for the purposes of a foreign bankruptcy proceeding. A “debtor” is defined as a foreign corporation or other foreign legal entity subject to a foreign bankruptcy proceeding in the country in which it is incorporated or established.

Smellie CJ found that because M3 Fund is not a legal entity,[4] it could not fall within the definition of “debtor” and the receivers could therefore not be “foreign representatives.”

Modified Universalism

The Grand Court rejected the receivers’ position that Cayman recognition could be obtained through the principle of modified universalism.

In reviewing the decisions in China Agrotech Holdings Ltd.[5] and Singularis Holdings Limited v PricewaterhouseCoopers,[6] Smellie CJ held that the principles of universality of insolvency or bankruptcy upon which Singularis and China Agrotech were decided had no applicability to the M3 Fund.

While the Grand Court determined that certain parallels could be drawn between a court-appointed receivership process and liquidation proceedings, Smellie CJ held that the case law does not justify a complete analogy that would permit the application of the principle of universalism to a receivership. In arriving at this determination, Smellie CJ considered the four distinct legal consequences to winding-up proceedings that would justify the application of the principle of universalism as canvassed by Lord Sumption of the Privy Council in Singularis:

1. Provides a mechanism of collective execution against the property of the debtor by a creditor whose rights are admitted or established;
2. Provides a procedural framework in which to determine probable rights of creditors in cases where they are disputed;
3. Brings into play statutory powers to vary the rights of persons dealing with the company or its assets by impugning certain categories of transactions; and
4. Brings into play procedural powers, generally directed toward enabling the liquidator to locate assets of the company or to ascertain its rights and liabilities.

Common Law Recognition

After dispensing with the statutory and modified universalism routes to Cayman recognition, Smellie CJ turned to the Grand Court’s inherent common law jurisdiction ruling that this was the most applicable route for the receivers.

The Grand Court arrived at this position after reviewing “a settled line of authorities,” including the leading U.K. authority of Schemmer and Others v Property Resources Ltd.,[7] the Cayman Islands Court of Appeal (CICA) decision in Canadian Arab Financial Corporation v Player (“Player”) [8] and the Grand Court decision in Stutts v Premier Benefit Capital Trust.[9]

The jurisdiction to recognize a receiver appointed by a foreign court has been “exercised time and again” by the Grand Court in the Cayman Islands.[10]

The Grand Court will exercise its jurisdiction to recognize a foreign court’s appointment of a receiver as a matter of comity if the Grand Court is satisfied that the foreign court was jurisdictionally competent to make such an appointment according to private international law principles. A foreign court will be considered jurisdictionally competent if there is “a sufficient connection between the defendant and the jurisdiction in which the foreign receiver was appointed to justify recognition of the foreign court’s order.”[11]

In Silk Road, Smellie CJ summarized the four tests adopted by the CICA in Player to determine whether a sufficient connection existed between the subject of the receivership and the foreign jurisdiction, as follows:

1. Has the company, in respect of whose assets the receiver and manager has been appointed, been made a defendant in the action in the foreign court?

A sufficient connection will likely be found if the subject of the receivership has submitted to the jurisdiction of the court in which the receiver is appointed.[12]

2. Has the company, in respect of whose assets the receiver and manager has been appointed, been incorporated in the country that appointed the receiver and manager?

If so, “recognition will be accorded” to such an appointment where the company has been incorporated.[13]

3. Would the courts of the country of incorporation recognize a foreign appointed receiver?

Judicial reciprocity alone may not be a sufficient factor to grant recognition of a foreign appointed receiver.[14]

4. Has the company carried on business in the foreign jurisdiction, or is the company’s central manager and control located in the foreign jurisdiction?

It has been said that a strong factual connection would exist in the scenario where the receivership appointment is made by a court in the country where the company carries on business.[15]

These four tests are not all dispositive in and of themselves, and each individual test or factor may carry more weight to meet the sufficient connection test. The more boxes you are able to tick off, the greater your chances will be that the Grand Court will find a sufficient connection to grant recognition.