Comment: Cayman Court rejects winding up of a Cayman fund by US Court appointed receiver

It is an overriding principal of Cayman law that, when a Cayman incorporated company is wound up, the laws and Courts of this jurisdiction will govern the liquidation.

Any insolvency proceedings in relation to such a company that are conducted overseas, will be ancillary.

This principal was resoundingly reaffirmed by Judge Henderson in the matter of Philadelphia Alternative Asset Fund Limited ("PAAF") in a Judgment handed down on 3 March 2006.

PAAF is a Cayman incorporated company which operated as a mutual fund regulated by CIMA.  A Receiver was appointed in mid-2005 on the application of the United States Commodity Futures Trading Commission when a massive trading loss, previously concealed from investors, was discovered.

When a number of investors subsequently petitioned to place PAAF into liquidation in Cayman, the Receiver reacted by opposing the Petition, as the US appointed representative of PAAF and its feeder fund, and by issuing an application for his recognition by the Cayman Islands’ Court.

He argued that a liquidation would serve no practical purpose and would mean a duplication of effort, delay and increased costs. Further he argued that the distributions made to investors should be in accordance with US law, despite the probability that investors in the Cayman Islands’ fund would be treated otherwise that in accordance with the Cayman Islands’ statutory regime in a winding up and the probability that, if there were a pooling of assets between the offshore and onshore funds pursuant to US law, this would have severely prejudiced the offshore investors.

There is a line of English and Cayman Islands’ cases which provide for the recognition of receivers, the principal one being Kilderkin v Player [1984] CILR 63.  However, none of these authorities provide for recognition, in the Cayman Islands, of a foreign appointed receiver of a Cayman Islands’ incorporated company.

Such receiverships have always related to foreign incorporated companies (or other entities, including trusts), where the foreign receiver has sought recognition in Cayman in order to repatriate assets located here, belonging to the entity, to the place of incorporation or establishment. Judge Henderson followed established principal by appointing representatives of Kroll (Cayman) Ltd as Official Liquidators and refusing the Receiver’s application for recognition.

The Honourable Judge relied on the fundamental principal that as Cayman is the domicile of the company, the liquidation must be governed by Cayman Islands’ law and supervised by the Grand Court, as established in the United Kingdom in cases dating from the late 19th century.

He added that investors in a Cayman Islands’ company had a reasonable and legitimate expectation that a winding up would occur in the Cayman Islands under Cayman Islands law.  Any arguments as to duplication of effort are quite unable to displace this principal, and have to be dealt with, and in many cases are satisfactorily addressed through, cooperation between a Cayman liquidator and the US regulatory receiver.

There is another principal (which was not subject to any finding of Judge Henderson) which on its own ought to have prevented recognition of the Receiver, namely that receivers appointed in proceedings brought by foreign governmental agencies to enforce foreign penal laws cannot be recognised here, even where the receiver, in reality, is only pursuing restitution for investors.

The judgment is thoroughly welcome by practitioners and investors alike. If the Grand Court had deferred to the foreign receivership, particularly in a case like this where a significant fund has collapsed in circumstances of massive fraud, investor confidence in the treatment of Cayman Islands incorporated funds could have been severely damaged.