Knowledge

Last week the litigation administrator of Celsius Network LLC ("Celsius"), a crypto exchange and lending platform that went bankrupt 18 months ago, commenced court actions in the USA against (reportedly) over 1,300 individuals and entities around the world. The claims are against account holders who Celsius claims have received "preferential payments" under US law in the run up to the Celsius bankruptcy, which commenced on 14 July 2022, by withdrawing funds from their accounts with Celsius (the "Clawback Claims"). Some of the targets of the Clawback Claims are Cayman Islands ("Cayman") located entities, which begs the question: if Celsius successfully obtains a judgment from a US court, can this be enforced in Cayman?

Understanding a US preference payment 

Under US law a preferential payment is a payment or transfer made by a debtor to a creditor for a pre-existing debt that is paid or transferred within a 90-day period preceding the filing for bankruptcy (for unconnected creditors) at a time when the debtor was insolvent and allowed the creditor to receive more than they were entitled to in bankruptcy proceedings. Where the creditor is connected, referred to as an insider (such as friends, family members or business associates), the relevant period preceding the filing is extended to one year. 

Where there has been a preferential payment a "clawback" action can be commenced to recover the preferential payment from the creditor who received it to return the payment back to the bankruptcy estate for distribution to all creditors. 

Cayman's position on judgment enforcement

In Cayman, common law principles apply for the enforcement of all foreign judgments (other than those from Australia) where the court will, as long as certain conditions are met, treat a foreign judgment as creating a debt due from the judgment debtor to the judgment creditor, and will then give a Cayman judgment on that debt. The process involves starting court proceedings for the sums due under the foreign judgment in Cayman and using the foreign judgment as evidence that there is no defence to that claim.

For any court order to be enforceable in the Cayman Islands as a foreign judgment, it would need to be:

- made by a court of competent jurisdiction;

- final and conclusive;

- not contrary to public policy in Cayman; and

- consistent with the principles of Cayman conflicts law.

Should Celsius seek to enforce any judgment from a US court (if obtained) in Cayman, there are a number of hurdles to overcome. 

Final and conclusive judgment of court of competent jurisdiction 

For a foreign judgment to be established as final and conclusive, the foreign court must give a judgment which is not provisional and, therefore, not subject to review in that court. The fact that such judgment is subject to appeal to a superior court does not prevent it from being considered final and conclusive.

If, by contrast, the judgment can be reopened and reconsidered in that same court, it cannot be said to be final and conclusive. Therefore, a judgment obtained in "default" of the defendant having appeared in the court where the judgment was obtained ("Default Judgment") (which often has the possibility of being set aside and overturned) is often not enforceable as final.

In addition, as the Default Judgment is usually obtained in "default" of the defendant having appeared in the court where the judgment was obtained, the court being asked to recognise the judgment may well conclude that the foreign court did not have jurisdiction over the debtor if the debtor was not present in that country and did not participate in the proceedings that led to the judgment. 

On that basis, Celsius might have a challenge enforcing a US court judgment for Clawback Claims against a Cayman incorporated company that did not take part in the US proceedings. 

Public policy/principles of Cayman conflict law - Cayman's position on preference payments 

Preference payments under Cayman law are voidable pursuant to Cayman's Companies Act (2023 Revision) (the "Companies Act"), which states that:

"Every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts […] with a view to giving such creditor a preference over the other creditors shall be voidable upon the application of the company’s liquidator if made, incurred, taken or suffered within six months immediately preceding the commencement of a liquidation." [emphasis added]

This is a notably different test to that of a US preference payment, such as those being made by Celsius, as it has no automatic "clawback" power from creditors who have been paid in the 90 days before the commencement of the bankruptcy/liquidation. As the claim arises from a US statutory power that has no Cayman equivalent, there is an argument that, as no action brought in a Cayman court for the "clawback" of a US preference payment could succeed under Cayman law, it should not be possible to ask a Cayman court to enforce a judgment based on such US "clawback" powers.

Ability to bring a claim 

To bring a claim, the creditor must show that they are the party with a right to receive the sums claimed. In corporate bankruptcy/liquidation cases, the claims are brought by individuals empowered by a court (usually) to represent the company to whom the sums claimed are owed and who have been given "standing" to bring claims on behalf of the company. However, a foreign court might not always recognise that standing. 

Under the Companies Act, the Cayman court may exercise its discretion to make orders ancillary to a foreign bankruptcy proceeding (under certain circumstances) upon the application of a "foreign representative" (i.e. a trustee, liquidator or other official appointed in respect of a debtor for the purposes of a foreign bankruptcy proceeding). The Celsius Clawback Claims are initiated by a litigation administrator, but a US bankruptcy law appointed litigation administrator would not appear to qualify for recognition as a foreign representative under the Companies Act (nor would a committee formed of a class of creditors, such as the Celsius Unsecured Creditor Committee). 

There are other ways to establish "standing" to enforce a foreign judgment in Cayman, such as obtaining a 'Letter of Request' for recognition. Nevertheless, this need to show "standing" is another hurdle which Celsius will need to overcome to enforce any US court judgment for Clawback Claims against a Cayman incorporated company.

Conclusion

The ability to successfully recover debts from foreign based debtors, as Celsius is attempting to do, will require a somewhat complex analysis of factors, including:

-      where the debtor and their assets are located and, therefore, whether the judgment needs to be exported;

-      what the basis of the claim is in the country in which it has been brought and whether that might be vulnerable to a public policy defence to enforcement in another country;

-      whether the court in an enforcement country will conclude that the home court had jurisdiction over the defendant when the judgment was obtained; and

-      the standing of the claimant to bring a claim for money belonging to the debtor in the place of enforcement.

Many international treaties on recognition and enforcement of judgments across borders have been implemented and are designed to get past many of these complexities. However, there are still many jurisdictions, such as Cayman, where the common law power to treat a foreign judgment as creating a debt due from the judgment debtor to the judgment creditor is the only basis upon which to seek to enforce most foreign judgments. Obtaining local law advice is crucial to debt recovery prospects in these circumstances. 

Having assisted many clients to both enforce and resist enforcement of foreign judgments in Cayman we can advise on "both sides of the fence" quickly and cost effectively.