Learning From Mistakes: Imposing Constructive Trusts Over Mistaken Payments

• Published date: 06 February 2023
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Walkers
• Author: Mr Rupert Bell, Daisy Boulter and Rebecca Moseley

Synopsis

In the recent judgment of Re Premier Assurance Group SPC Ltd. (in Official Liquidation) (unreported, Smellie C.J., Cause No. FSD 264 of 2020 (ASCJ), 7 April 2022), the Grand Court of the Cayman Islands sanctioned a decision by the joint official liquidators ('JOLs')1 of Premier Assurance Group SPC Ltd (in Official Liquidation) (the 'Company') to return (or procure the return of) certain payments held by or on behalf of the Company referable to one of its segregated portfolios, Premier Assurance Segregated Portfolio ('PASP'), to the respective payers on the basis that such sums were paid by mistake.

In that case, the Grand Court provided helpful guidance of the principles on which a constructive trust may be imposed in respect of payments made by mistake, which will be of fundamental importance in the context of insolvency where there are competing claims to money between the general body of creditors of an insolvent company and a person making a proprietary claim over the money. This article provides an overview of that decision and, in particular, a summary of factors to consider where payments are made to a company by mistake after the commencement of its liquidation.

The winding up of the Company

The Company was registered as an exempted segregated portfolio company in the Cayman Islands and was previously issued with an unrestricted Class 'B' Insurer's Licence. Unit-linked life insurance products were offered through PASP globally (with the exception of the United States) and sold to markets in the Latin American, Caribbean (except the Cayman Islands), European and Asian regions.

The key events leading to the winding up of the Company were as follows:

(a) On 14 September 2020, the Cayman Islands Monetary Authority ('CIMA') exercised its powers under the Insurance Act, 2010 to appoint joint controllers ('Joint Controllers') to assume control over the affairs of the Company.

(b) FollIn the instant case, the JOLs sought sanction pursuant to Section 110(2)(a) of the Companies Act thatowing the recommendations of the Joint Controllers, CIMA presented a winding up petition in respect of the Company on 26 October 2020 (the 'Winding Up Petition'). As explained in further detail below, the JOLs' sanction application to the Grand Court concerned mistaken premium payments received by or on behalf of the Company referable to PASP after this date.

(c) On 27 October 2020, the Grand Court appointed the Joint Controllers as joint provisional liquidators ('JPLs') of the Company pursuant to section 104(3) of the Companies Act (2022 Revision) ('Companies Act') to enable the JPLs to properly investigate the terms of a potential proposal and to explore any viable options to sell the insurance business of PASP to third parties. Ultimately, however, no offers were received and the JPLs recommended that CIMA proceed with the Winding Up Petition.

(d) On 19 April 2021, the Grand Court made a Winding Up Order against the Company and appointed the JPLs as JOLs. Shortly thereafter, CIMA revoked the Company's Class 'B' Insurer's Licence effective on 19 April 2021.

The Mistaken Payments

During the course of their investigations, the JOLs identified that a number of premium payments held by or on behalf of the Company referable to PASP had been received from participants who hold or held insurance policies referable to PASP (the 'Participants') after the commencement of the winding up on 26 October 2020 (i.e. the date of the presentation of the Winding Up Petition) (referred to as the 'Mistaken Payments'). Generally, those erroneous payments were made due to automated bank transfers (direct debit) or charges on a credit card.

There were two main categories of Mistaken Payments:

(a) Firstly, premium payments totalling over USD 500 000 were paid directly into two bank accounts in the name of the Company referable to PASP and under the control of the JOLs between 27 October 2020 and 30...