Restructuring & Insolvency analysis: How will the court approach applications by insolvency practitioners (IPs) under sections 236 and 366 of the Insolvency Act 1986 (IA 1986) for the purpose of litigation? Robert Amey of South Square, who successfully represented the applicant in a recent case, says the court was required to balance the reasonable requirement of the liquidators against the need to avoid making an unreasonable, unnecessary or oppressive order.
Litigation in the course of insolvency (Re Primeo Fund (in liquidation))
The Companies Court, in a matter brought under the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (CBIR), and IA 1986, granted the joint liquidators of Primeo Fund, a Cayman company, an order, under IA 1986, s 236, requiring information from the respondents, as part of the joint liquidators’ inquiry into Primeo’s affairs. Information alleged to be held by the respondents had been raised in proceedings brought in the Cayman Islands against Cayman defendants, who had been accused of breaching their duty to Primeo. The court held that the joint liquidators reasonably required the information sought in order to carry out their functions, which included pursuing claims currently before the Cayman court and that there was nothing unfair, let alone, oppressive, in their seeking the further information, which they sought. The court ruled that, in certain cases, it could be unfair to a defendant to litigation for powers under IA 1986, s 236 to be used to examine the defendant himself or the defendant’s witnesses and thereby circumvent the ordinary processes of litigation. However, that could not be equated with a hard and fast rule that it was always unfair for a liquidator qua litigant ever to use the IA 1986, s 236 powers to obtain something which it could not otherwise obtain.
How did the issue arise?
The company, Primeo, was a Cayman Islands investment fund, whose administrator and custodian were two HSBC entities. Monies invested with Primeo ultimately found their way to the notorious Ponzi scheme operated by Bernard L Madoff Investment Securities (BLMIS). The fraud perpetrated by BLMIS on investors (including Primeo) resulted in the collapse of BLMIS and the commencement of Primeo’s liquidation in early 2009. Primeo’s Caymanian liquidators were then recognised in England and Wales under the CBIR.
Primeo’s liquidators subsequently commenced proceedings before the Grand Court of the Cayman Islands against the two HSBC entities, alleging various breaches of duty concerning the loss of Primeo’s investments with BLMIS, and claiming damages in the region of US$2bn. Among other things, Primeo alleged that HSBC had caused Primeo’s assets to be placed with BLMIS, despite being aware as early as 2002 that BLMIS represented an unacceptable fraud risk.
As part of its defence, HSBC argued that in 2006 (and again in 2008) it had sent personnel from KPMG’s London office to investigate Madoff, and that KPMG had assured HSBC that no fraud was taking place. These assurances were said to have been provided in undocumented, oral conversations between HSBC and KPMG personnel.
Primeo’s liquidators considered that if they were to test the evidence of HSBC’s witnesses in cross-examination, it would be necessary to obtain KPMG’s version of events. However, KPMG, which owed a duty of confidentiality to HSBC, was unwilling to provide the information sought by the liquidators. The liquidators therefore applied under IA 1986, s 236 and Article 21(1)(d) of Schedule 1 to the CBIR (Article 21) to compel a partner in KPMG to answer questions concerning the HSBC/BLMIS engagement, and to produce contemporaneous documents held by KPMG.
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What were the main legal arguments?
Richard Fisher and I, on behalf of the liquidators, submitted that Article 21 and IA 1986, s 236 were expressed in very broad terms. According to the authorities, provided that the office-holder ‘reasonably requires’ the information and documents he seeks for his official functions, and that the order sought would not impose an unnecessary and unreasonable burden on the respondent, an order should be made. It was no bar that documents and information were being sought from somebody (KPMG, in this case) who had no contractual relationship with the company in liquidation. Nor was it necessarily a bar that the information and documents were sought for the dominant purpose of carrying on litigation, since the litigation was being carried on for the purpose of the liquidation. Furthermore, there was no risk of an unreasonable burden being placed on KPMG—the liquidators were willing to pay KPMG’s costs of compliance, and as a large firm, KPMG would not find it difficult to produce the documents sought.
Daniel Bayfield QC on behalf of KPMG accepted that Article 21 and IA 1986, s 236 were expressed in very broad terms, but argued that this was all the more reason why the ‘extraordinary power’ conferred by those provisions should be exercised with caution. KPMG argued that the following factors weighed heavily against the grant of relief:
- firstly, KPMG’s client was HSBC, and KPMG had no prior relationship with Primeo. The court should be slower to make an order against ‘outsiders’ than against persons with a pre-existing relationship with the company, such as the company’s own accountants
- secondly, Primeo’s liquidators were using their statutory powers essentially in order to obtain non-party disclosure for the purpose of ordinary commercial litigation, circumventing the ordinary rules of civil procedure applicable to such applications. The prejudice to HSBC was compounded by the fact that trial in the Cayman Grand Court was only a few weeks away, and that although Primeo, acting through its liquidators, had an ability to obtain documents and information under Article 21 and IA 1986, s 236, HSBC had no such power
What did Nugee J decide?
Nugee J granted the relief sought by the liquidators. He noted that he was required to balance the reasonable requirement of the liquidators against the need to avoid making an unreasonable, unnecessary or oppressive order. As for the first limb, the judge considered that the liquidators did have a reasonable requirement for the information and documents sought for the purpose of pursuing the litigation before the Cayman Grand Court. The judge also noted that although it might be inconvenient for KPMG and the partner named in the application to comply with the order, this did not make it oppressive—KPMG would be paid its costs of compliance.
As for the risk of oppression to HSBC, the judge considered that it was appropriate to take this into account, and noted that there were many examples in the reported cases of relief being refused because an office-holder had sought to circumvent the ordinary rules of civil procedure by using his IA 1986 powers to examine the defendant or his witnesses in advance of trial. However, the judge held that there was no hard and fast rule that it is always unfair for a liquidator qua litigant ever to use the IA 1986, s 236 powers to obtain something which he could not otherwise obtain, and the court always has a discretion.
In the present case, HSBC had put in issue before the Cayman Grand Court what KPMG had said to HSBC. According to the judge, there was nothing unfair or oppressive about seeking further information about those conversations from KPMG, even though their dominant or even sole purpose was to advance their case in the Cayman litigation, and even if they could not obtain the information in any other way. The balance therefore came down clearly in favour of granting the relief.
What are the practical implications for IPs seeking documents and examination of witnesses for ongoing litigation?
The judgment helpfully makes clear that relief is in principle available even where the office-holder’s sole purpose in making the application is to bolster his case in ongoing litigation. However, IPs should still exercise caution. Although there is no hard and fast rule that relief will be refused when litigation is underway, there will still be many cases where relief will be refused on discretionary grounds if the court considers that the timing of the application, or the nature of the relief sought, would cause unfairness. IPs considering using their s 236/366 power for the purpose of litigation should take prompt legal advice from an insolvency law specialist to ensure that the timing and formulation of any application will give the highest likelihood of success.
Interviewed by Nicola Laver.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.