The surge in interest in litigation funding is showing no signs of abating. Instead, it is accelerating. Litigation funders have seen a continued spike in enquiries that has undoubtedly been assisted by reforms in England proposed by Lord Justice Jackson and the intended formation of the Association of Litigation Funders that would see a closer regulation of the industry. The international character of litigation funding is similarly increasing. Indeed, many of the litigation funds are incorporated in offshore jurisdictions, generating interesting issues in litigation if things go wrong.
This article sets out the background to the appointment of receivers over two such funds, the Axiom Legal Financing Fund and the Axiom Legal Financing Fund Master SP, that had each been established as portfolios (the “Portfolios”) in segregated portfolio companies (“SPCs”).
In contrast to the law governing liquidations in the Cayman Islands, the law governing segregated portfolio receiverships (“SP receiverships”) is still in its early stages and offers limited analogous provisions and guidance when dealing with practical issues. It is thought that this appointment was, and remains, the first of its kind in the Cayman Islands, proffering landmark decisions and setting out standards of best practice for officeholders administering SP receiverships (“SP receivers”). In this case, it was necessary for findings to be made to accommodate gaps in the legislation and crystallise the framework within which SP receivers were expected to operate. This article reviews the approaches taken by the receivers to deal with the lacunae in the law in order to be able to obtain the recognition of the English courts.
BACKGROUND TO THE RECEIVERSHIP ORDERS
Following articles in the press alleging fraud and mismanagement of the Portfolios, petitions to place the Portfolios into receivership were filed at the Grand Court of the Cayman Islands (“the Court”) in December 2012. The Court heard arguments as to how the Portfolios should be dealt with, including restructuring proposals and applications to place the entirety of the SPC’s into liquidation. However, following the raft of redemption requests received by the Funds following the allegations in the press, there was clear evidence that the Portfolios were insolvent. The other portfolios within both SPCs, however, were solvent.
Applying the case of ABC Ltd v. J & Co Ltd (CICA, Unreported, May 2012), the Court decided that the SPCs should be left intact so that the remaining portfolios could continue their businesses unimpeded by the Portfolios’ demise. In February 2013, the Court therefore appointed Michael Saville and Hugh Dickson of Grant Thornton in the Cayman Islands and James Earp of Grant Thornton in London, as SP receivers (the “Receivers”) to the Portfolios (the “Receiverships”).
The Receivers subsequently sought directions from the Court as to their role and the extent of their powers. The Orders and Ruling given by the Honourable Mr Justice Foster QC in respect of the issues set out below represents Cayman’s first piece of jurisprudence on the logistics surrounding these receiverships.
1) Filling the gaps - the Receivers’ powers
Section 224(3) of the Cayman Companies Law (2012 Revision) (the “Law”) confirms that the role of an SP receiver is to manage the business and assets of the relevant portfolio for the purposes of closing down its business and distributing its assets “to those entitled to have recourse thereto.”
Section 226 of the Law states that an SP receiver “may do all such things as may be necessary” to fulfil that role and “shall have all the functions and powers of the directors” in respect of the business and assets of the relevant portfolio. It confirms that the functions and powers of the former directors (in respect of that portfolio) cease accordingly.
Section 226(3) confirms that the receiver, in exercising his functions and powers, is deemed to act as an agent of the SPC, and subsection (5) imposes a moratorium over it.
The Court held that, in light of the Receivers’ duty to close down the business of the Portfolios and distribute their assets, and given that the Receivers may do whatever is necessary for those purposes whilst possessing the functions and powers of the directors, “the practical intent of the Law is that a receivership of a segregated portfolio is in effect to close down that portfolio without a liquidation of the whole company.”
2) Receivers’ powers to include those of a liquidator
The Judge found that in order to fulfil their duties, the Receivers “may well need powers the same or similar to those of a liquidator.” Each case must be considered according to its facts, but he could see no reason why the Receivers’ powers could not include those liquidators’ powers relating to investigation into the affairs of a company and claims for voidable preference, fraudulent dispositions and fraudulent trading. He similarly applied legislative regimes originally drafted for liquidators to the Receivers, where the legislation was silent, in respect of issues such as receivership committees, committee meetings, fee reviews and reporting to investors.
3) Receivers’ powers to bring legal proceedings
Section 216(2) of the Law provides that, although an SPC is a single legal entity, any portfolio within it “shall not constitute a legal entity separate from the segregated portfolio company.”
A key issue determined by the Court, therefore, was whether this precluded the Receivers from bringing legal proceedings in relation to the assets of the Portfolios, when the Portfolios on behalf of which they acted were not separate legal entities.
The Judge found that the key to this question lay in:
- The classification of the portfolio’s assets as assets of the SPC (sections 216(1), 219(1) and 219(2));
- The Receivers’ assumption of the former directors’ powers; and
- The fact that the Receivers are deemed to act as agents of the SPC in exercising their functions and powers.
This led him to conclude that the portfolio assets were assets of the SPC and that an SP receiver “has power to bring proceedings in the name of the company itself in respect and on behalf of the segregated portfolio of which he is receiver in appropriate circumstances…”
4) UK Recognition or Assistance
In order to seek the assistance of third parties domiciled in the UK with their investigations, and in view of claims the Portfolios potentially had against parties based in the UK, the Receivers needed their appointment to be recognised by the English Courts, either (a) under the UK’s version of the UNCITRAL Model Law, known as the Cross-Border Insolvency Regulations (CBIR), and/or (b) by way of a Letter of Request.
Article 15(1) of the CBIR states that “A foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed.”
- To be recognised as a foreign proceeding, the regime or appointment must be:
- A collective judicial or administrative proceeding;
- Pursuant to a law relating to insolvency;
- Where the assets and affairs of the debtor are subject to supervision by a foreign court;
- For the purpose of reorganising or liquidating the debtor’s estate; and
- Conducted by a ‘foreign representative’ (that is, a person authorised to act as representative of the foreign proceeding).
CBIR: CASE LAW
The Court considered the case of In Re Stanford International Bank Ltd  Ch.33, in which an unsuccessful application for recognition was made to the English High Court by a receiver appointed under US Law. The Receivers successfully distinguished the Receiverships from In Re Stanford as follows:
- The law governing the Receivers’ appointment related to insolvency. The receivership order in In Re Stanford was made without any consideration of insolvency but was made to prevent dissipation and waste.
- An SP Receivership is inclusive and collective, concerned with the distribution of its assets to all “those entitled to have recourse thereto”. The Stanford receivership was established to prevent damage to some investors, leaving others outside the process, so was not inclusive or collective.
- The Receivers have the power to make distributions. The Stanford receivership order conferred no such power on its receiver.
- An SP receivership has the effect of placing a moratorium on all actions against the SPC in respect of the relevant Portfolio. The Stanford receivership order imposed no moratorium on the company.
The Court was satisfied that the conditions were met by the Receiverships and issued certificates as required by the CBIR, affirming the Receiverships as a ‘foreign proceeding’ and the Receivers as foreign representatives, for submission to the English Court. The Court also granted the Receivers’ application in the alternative, for letters of request to be issued to the English Court seeking its assistance under section 426 of the English Insolvency Act 1986 for recognition of the Receivers and their powers. The English Court, however, did not need the letters as, in agreement with the Cayman Court, it considered the Receiverships to be eligible for recognition under the CBIR.
Although the author was previously involved on the Cayman side of the matters set out above, the case has progressed significantly since that time. One of the Receivers, Michael Saville of Grant Thornton in the Cayman Islands, has commented that the recognition order granted by the English Court has facilitated the bringing of claims, in sums of up to £110 million, against those who are considered to have acted fraudulently in relation to the Portfolios. Whilst the route to recovery of funds for investors progresses through litigation, the willingness of the English Court to extend its assistance to the Cayman Islands’ Court-appointed Receivers has significantly reduced the challenges they would otherwise have had to confront.
It is often said that to promote investment, you need certainty of outcome. The performance of SP receiverships is thus increasingly important if the purpose of the SPC structure, to protect the remainder of the SPC despite the downfall of one of its portfolios, is to survive. Investors and practitioners can therefore take comfort from this decision, particularly when the popularity of SPCs as fund structures is not waning.