Dispute Resolution Review (4th Edition) - Cayman Islands

Article by Katie Brown1


    The Cayman Islands is a British Overseas Territory, and Cayman law is in general based on English common law and certain English statutes that have been applied to the Islands, and local legislation enacted by the Legislative Assembly ('the LA'). The United Kingdom retains the right to extend provisions of UK legislation to the Cayman Islands by way of an express provision in the Act itself or by Order in Council.

    A new Cayman Islands Constitution came into force on 6 November 2009 reflecting and further defining the increased scope of local legislative authority and introducing a Bill of Rights.2

    Significant litigation takes place in the Grand Court ('the Court'). Most significant commercial disputes are commenced in the Financial Services Division, which was established in 2009.

    The Grand Court judiciary consists of the Chief Justice and five other full-time judges (supplemented from time to time by acting judges brought in from overseas or drawn from the ranks of senior Cayman Islands practitioners) who exercise the same jurisdiction as the English High Court. The Grand Court judges, especially in the Financial Services Division, have considerable experience of disputes involving complex offshore transactions and structures, particularly in the context of hedge fund and commercial trust litigation.

    Appeals from the Grand Court to the Cayman Islands Court of Appeal are governed by rules set out in the Court of Appeal Law3 and the Court of Appeal Rules.4

    The Cayman Islands Court of Appeal is widely regarded as one of the strongest appellate courts in the Caribbean and the offshore world.

    In certain circumstances, an appeal from a decision of the Cayman Islands Court of Appeal can be made to Her Majesty's Judicial Committee of the Privy Council. The process is governed by the Cayman Islands (Appeals to Privy Council) Order 1984, a UK statutory instrument that came into operation on 1 September 1984.

    Decisions of the Grand Court, the Court of Appeal and the Privy Council on appeals from the Cayman Islands are reported in the Cayman Islands Law Reports, cited as CILR, which are published by Law Reports International.

    Since 2006, a right of petition to the European Court of Human Rights following the exhaustion of traditional domestic legal remedies has existed. In 2009, the first case from Cayman using this procedure was heard and ruled admissible by the European Court of Human Rights.

    Litigation remains the principal method for resolving disputes, partly because of the accommodating approach shown by the Grand Court to parties requiring confidentiality or flexible timetables (factors that usually attract parties to arbitration). However, awareness and use of alternative dispute resolution ('ADR') mechanisms is growing.

    The Law Reform Commission has submitted an Arbitration Bill for enactment by the Legislative Assembly in 2012, following extensive consultation with professional associations such as the Law Society and the Caymanian Bar Association. The Bill will dramatically modernise the arbitration regime in the Cayman Islands, based on the UNCITRAL Model Law with certain variations to suit local conditions. This initiative has strong support from the Cayman judiciary, in particular judges of the Financial Services Division who have substantial arbitration experience, and whose decisions in the course of the last year have demonstrated consistent respect for and enforcement of parties' rights pursuant to arbitration agreements.


    Investment fund disputes

    i. Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom5

    In this case, the Grand Court found a fund's independent directors guilty of wilful default in the discharge of their duties, and ordered them to pay damages to the fund's liquidators in the sum of US$111 million, representing the losses suffered by the fund that were caused by their default.

    The facts were extreme: the directors in question were the brother-in-law and stepfather of the investment manager, and had been appointed by him to meet minimum legal requirements. During their tenure they failed to exercise any independent supervisory function and failed to spot fraudulent activity by the investment manager. The Court held that, since investment management, administration and accounting functions are delegated to professional service providers, hedge fund directors must exercise a high-level supervisory role. Because these directors knew that they had a duty to supervise, and had intentionally neglected their duties, the directors were found guilty of wilful default and were therefore not entitled to the benefit of exculpatory provisions contained in the company's articles of association.

    The judgment contains the first detailed judicial commentary on the obligations of a fund director during the life cycle of a fund (establishment, ordinary course of business, financial crisis and liquidation). It is, however, subject to appeal, which is scheduled to be heard in April 2012.

    ii. Re AJW Master Fund II, Ltd6

    This was an application by liquidators of an offshore feeder fund to replace the liquidators of the master fund.

    The offshore feeder fund had been put into official liquidation on an investor's petition. Days prior to the hearing of the offshore feeder winding-up petition, management had put the master fund into voluntary liquidation. The master liquidators applied for a Court supervision order, which was granted on paper the day before the hearing of the feeder winding-up petition.

    The judge who determined the master liquidators' application for Court supervision, Quin J, was told that the hearing of the offshore feeder winding-up petition had 'no bearing' on the supervision application. Henderson J, the judge who heard the offshore feeder winding-up petition, was not aware of the supervision order that had been made at master level the day before. Henderson J held that the practitioners who had been appointed as liquidators at master level were conflicted, and appointed liquidators from a different firm. This had the unfortunate result that different liquidators were appointed at master and feeder level.

    The liquidators of the offshore feeder fund then applied for the removal of the master liquidators on the basis that there should be one set of liquidators appointed to both funds, that the master liquidators were conflicted and that investors had expressed concerns about their relationship with former management (which was under investigation by the SEC), as well as the timing of their appointment.

    Jones J removed the master liquidators and made the following observations:

    best practice is for the same liquidators to be appointed at both master fund and feeder fund level where both funds are the subject of insolvency proceedings; best practice is to assign the cases to the same judge; the process by which a voluntary liquidation can be converted to an official liquidation 'on the papers' is analogous to an ex parte application, which means the applicant has an obligation of full and frank disclosure; and in a master-feeder structure, investors in both offshore and onshore feeder funds will be treated as having a direct interest in the master fund, even though they are not directly members of the master fund. These investors will have standing to apply to set aside an improperly obtained supervision order, and also to appear and be heard on the hearing of the petition to wind up the master fund notwithstanding the fact that they are neither creditors nor contributories of the master fund. Jones J made a costs-capping order that was successfully appealed by the liquidators of the offshore feeder fund.7 Jones J's decision was made on the basis that he thought there was a cheaper route to resolving the issue, namely an application to set aside the supervision order rather than applying to remove the master fund liquidators. The Court of Appeal removed the costs cap and approved English authorities that state that a first instance judge seeking to impose punitive or unusual costs orders as a general rule is required to give reasons for such a departure. They also endorsed Jones J's view that investors' interests are generally served by the appointment of the same liquidators at master and feeder fund level.

    iii. Re Heriot-African Trade Finance8

    In this case Jones J followed his earlier decision in Re Belmont Asset Based Lending,9 holding that it was just and equitable to make a winding up order on the basis of loss of substratum if the fund was no longer viable, in the sense that it was practically impossible to carry on its business in accordance with the reasonable expectations of its participating shareholders, based upon the representations contained in its offering memorandum.

    Jones J was referred to the decision of Banister J in the Eastern Caribbean Supreme Court (British Virgin Islands (BVI)) in Aris Multi-Strategy Lending Fund Ltd v. Quantek Opportunity Ltd.10 In that case, Banister J specifically declined to follow the approach that Jones J had taken in Belmont and refused to allow a loss of substratum plea where it was contrary to the wishes of the majority investors unless it could be shown that it was impossible, as opposed to impractical, for the business of the company to be carried on. Jones J observed that, if he had understood Banister J's judgment correctly, the law of the BVI is not the same as the Cayman Islands.

    It will be interesting to see what happens when this divergence in views between Cayman and the BVI is tested by the appellate courts, especially since both Cayman and the BVI share the same ultimate appellate authority, the Privy Council.

    iv. Re Times Property Holdings Ltd11

    The petitioners had issued a winding-up petition on grounds of insolvency. The company applied to have the petition dismissed on the grounds that the debt was...

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