In the Matter of Silk Road Funds Ltd - Cayman Court Clarifies the Appropriate Paths to Recognition for Foreign Receivers

With the Cayman Islands maintaining its position as the offshore jurisdiction of choice for lending and security structures, it comes as no surprise that there continues to be a great deal of interest in how receivers appointed either by foreign courts or under foreign law-governed documents can get their hands on assets located in the Cayman Islands or belonging to Cayman Islands entities.

This article, based on a published judgment from the Grand Court of the Cayman Islands (“Cayman Court”), focuses on how receivers appointed by foreign courts or by foreign governmental bodies such as the Securities and Exchange Commission may seek the recognition of the Cayman Court of their appointment and powers.

In the matter of Silk Road Funds Ltd (“Silk Road”), the Cayman Court considered the possible routes available to foreign-appointed receivers to gain recognition of their appointment and of the powers vested in them. The judgment clarifies for the officeholder which route it should take, dependent on the circumstances of its appointment.  The Cayman Court looked at recognition pursuant to (1) Part XVII of the Companies Law (2018 Revision, but at the time the 2016 Revision), (2) the principle of “modified universalism” and (3) the common law decisions spearheaded by the Cayman Court in Stutts v Premier Benefit Trust (“Stutts”) and the Cayman Island Court of Appeal in Canadian Arab Financial Corporation and Kilderkin v Player (“Kilderkin”).

In Silk Road, Krys Global had been appointed as Joint Receivers by the Supreme Court of Bermuda over a segregated account (the “M3 Fund”) of Silk Road Funds Limited, a Bermudian segregated accounts company (“SAC”). The Cayman Islands equivalent of a SAC is the segregated portfolio company (“SPC”). A SAC segregated account is not a separate legal entity, much in the same way that a segregated portfolio is not a separate legal entity to its SPC.

The Joint Receivers required not only the recognition of the Cayman Court of their appointment and the powers granted to them by order of the Bermudian Supreme Court, but also the Cayman Court’s assistance by permitting the Joint Receivers to pursue third party disclosure orders against a Cayman Islands domiciled bank (in liquidation) pursuant to the well-known principles set out in Norwich Pharmacal v Customs and Excise Commissioner, which relief was granted at a later hearing.

The Statutory Route
The ability of a foreign receiver to take advantage of a statutory path to recognition depends upon the successful negotiation of a maze of statutory definitions. The Cayman Court may make orders (such as an order recognizing the right of a foreign representative to act on behalf of a debtor) ancillary to foreign bankruptcy proceedings (which include “proceedings for the purpose of reorganizing or rehabilitating an insolvent debtor”), where a debtor is a “foreign corporation or other foreign legal entity subject to a foreign bankruptcy proceeding in the country in which it is incorporated or established”, and where a foreign representative means “a trustee, liquidator or other official appointed in respect of a debtor for the purposes of a foreign bankruptcy proceeding”.

The reason why the Part XVII route was not available to the Joint Receivers of the M3 Fund was because, as noted above, a segregated account is not a separate legal entity and therefore could not be a “debtor”. The corollary of this was that the Joint Receivers were not “foreign representatives”.

The Modified Universalism Route
“Modified Universalism” was described by Lord Sumption in the Privy Council case of Singularis Holdings Limited v. PricewaterhouseCoopers (“Singularis”) as follows:

“…the principle of modified universalism, namely that the court has a common law power to assist foreign winding up proceedings so far as it possibly can”.

The Cayman Court in Silk Road confirmed that the principles of modified universalism applicable to foreign winding up proceedings are not applicable to receivership proceedings. It zeroed in on these “distinct legal consequences” of winding up proceedings as described by Lord Sumption in Singularis:

1. The proceedings are “a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established”;

2. The proceedings provide “a procedural framework in which to determine what are the provable rights of creditors in cases where they are disputed”;

3. The proceedings bring into play “statutory powers to vary the rights of persons dealing with the company or its assets by impugning certain categories of transaction”; and

4. The proceedings bring into play “procedural powers, generally directed to enabling the liquidator to locate assets of the company or to ascertain its rights and liabilities”.

The Cayman Court considered that the absence of the four distinct legal consequences in receivership proceedings prevented the application of modified universalism to the proceedings in Silk Road.

The Common Law Route
The Cayman Court did, however, find that the Joint Receivers could gain recognition through the line of common law authorities emanating in England and Wales and applied in the Cayman Islands in Kilderkin.

For a foreign-appointed receiver to be recognized by the Cayman Court using this route, a “sufficient connection” must be established between 1) the entity over whose assets the receiver has been appointed and 2) the jurisdiction in which the receiver is appointed. In Schemmer and others vs Property Resources Ltd and others, Goulding J of the English Chancery Court suggested the following four tests to assess the existence of a “sufficient connection”, which were applied in Kilderkin and Silk Road:

1. Has the company in respect of whose assets the receiver and manager has been appointed, been made a defendant in the action in the foreign court?

2. Has the company in respect of whose assets the receiver and manager has been appointed, been incorporated in the country which appointed the receiver and manager?

3. Would the courts of the country of incorporation recognise a foreign appointed receiver?

4. Has the company carried on business in the jurisdiction of the appointment or is the seat of its central management and control located there?

Whilst in Silk Road the Cayman Court found that each of the four tests had been satisfied, it is the author’s view that, based on both case law and academic authorities, it is not imperative that all four tests be passed.

That said, satisfaction of the four tests (or a number of them) will not guarantee recognition. A Cayman court will not recognize a foreign-appointed receiver if to do so would be to give effect, either directly or indirectly to a penal, revenue or other public law of a foreign state. For example, in Stutts, the Cayman Court refused to recognize a receiver who had been appointed by a US court in proceedings brought by the SEC seeking disgorgement for breaches of the Securities Act 1933 and the Securities Exchange Act 1934. 

However, cases decided in common law jurisdictions since Stutts demonstrate, in the author’s view, a willingness of courts to distance themselves from narrow interpretations of the rule, particularly if the purpose of the receiver’s appointment is to return assets to defrauded persons.