litigation news, q3 2017 - mourant ozannes · litigation news, q3 2017 ... disclosure order...

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Litigation News, Q3 2017

A warm welcome to the latest edition of Mourant Ozannes' litigation newsletter

It has been another busy quarter across our jurisdictions, with continued developments to law and regulation, and decisions made in the Courts that may well have an impact on companies, trusts, trustees and other clients

we work with on a regular basis.

Contents

Cross-Examination on Asset Disclosure ............................................................................ 2

Non party costs in Cayman: the real loser must pay ......................................................... 6

Confirmation: dissenting shareholders are entitled to interim payments ....................... 10

Fair value update: consent means consent ..................................................................... 13

A new era of intellectual property protection in the Cayman Islands ............................. 17

Not merely shadowy figures – In Re Exten Investments Funds et al .............................. 20

In re NBRL Global Ltd ..................................................................................................... 24

Cyber security: the evolving nature of a director's duty ................................................. 27

Tax planning disaster – Guernsey court to the rescue setting aside transfer to a trust on

ground of mistake .......................................................................................................... 30

The use of notification injunctions as an asset preservation tool in Guernsey ................ 32

The Paternalistic Trustee – when is it appropriate to keep a young adult beneficiary in

the dark .......................................................................................................................... 35

Crociani v Crociani .......................................................................................................... 37

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Cross-Examination on Asset Disclosure

Update prepared by Shane Donovan (Senior Associate, British Virgin Islands)

August 2017

Although BVI courts undoubtedly have jurisdiction to make freezing orders and

ancillary asset disclosure orders against foreign defendants, ordering a foreign

defendant to attend for cross-examination on his asset disclosure is an exercise of an

exorbitant jurisdiction. BVI courts therefore do not have jurisdiction in the wider sense

to make orders for cross-examination on asset disclosure against foreign defendants

who have not submitted to the court's jurisdiction.

Freezing Orders and Ancillary Asset Disclosure Obligations

In order to preserve assets of a defendant so that they can, if necessary, be available to satisfy a prospective BVI judgment, a claimant (or prospective claimant) may be able to obtain an order (commonly known as a freezing order) restraining a defendant (or prospective defendant) from dealing with his assets up to the value of the claim pending judgment if he is able to demonstrate:

• a good arguable case; and

• a real risk that the defendant will dissipate or dispose of his assets, or deal with them in such a way as to make enforcement of any judgment more difficult.

In order for the claimant to be able to police the freezing order effectively, it will invariably include an ancillary disclosure order requiring the defendant to make disclosure of his assets by affidavit. Where a defendant's response to his disclosure obligations related to his assets is unsatisfactory, it may be just and proportionate for

the court to order cross-examination in aid of asset disclosure.

The power of the courts of the British Virgin Islands to order a foreign defendant who has not been formally served with the claim, or is contesting the jurisdiction of the court, to make disclosure of his assets is well established. But, can a foreign defendant who has not submitted to the jurisdiction of the BVI court be ordered to attend before the court to be cross-examined on his asset disclosure? This issue was recently considered by the Eastern Caribbean Court of Appeal in Rogalskiy v JSC MCC Eurochem (Appeal No. BVIHCMAP2017/0007, 14 July 2017).

Background

The appellant, Mr Rogalskiy, is a Russian national residing in Moscow. He had been employed by the Respondent, JSC MCC Eurochem, a Russian joint stock company trading in fertilizers and chemicals on the international market, as its sales and marketing director. His employment was terminated in May 2014, on the basis of his alleged involvement in a bribery scheme with Eurochem's trading partners by which he is alleged to have received over $45 million in bribes. It is Eurochem's case that the bribes were paid to various entities

controlled by Mr Rogalskiy including BVI companies.

Eurochem commenced proceedings in the BVI Commercial Court against Mr Rogalskiy and 17 other defendants,

and obtained the court's permission to serve the claim form on Mr Rogalskiy outside the jurisdiction. Service of the proceedings using the procedures in the Hague Service Convention was attempted. However, Mr Rogalskiy disputed that he had been validly served with the proceedings, and made an application to the BVI court challenging its jurisdiction.

The Court of Appeal had previously upheld an appeal by Eurochem against the Commercial Court's dismissal of

an application for a freezing order against Mr Rogalskiy, and made such an order itself. That order included an ancillary disclosure order requiring Mr Rogalskiy to disclose all of his worldwide assets exceeding $10,000 in value. When Mr Rogalskiy failed to make disclosure of his assets within the specified time, Eurochem applied



for an order that he be declared to be in contempt of court (the Contempt Application). On the eve of the hearing of the Contempt Application, Mr Rogalskiy belatedly filed and served an asset disclosure affidavit. The Contempt Application was therefore adjourned to allow Eurochem's legal practitioners time to consider the

disclosure affidavit.

When the Contempt Application came back on for hearing, counsel for Eurochem told the court that Eurochem was in the process of preparing an application to cross-examine Mr Rogalskiy on certain deficiencies in his asset disclosure affidavit, and that the cross-examination would be highly material to the Contempt Application. The Contempt Application was therefore further adjourned.

Eurochem then filed an application to cross-examine Mr Rogalskiy on his asset disclosure affidavit. That application was granted by the Commercial Court on the basis that there was strong evidence that Mr Rogalskiy

had been involved in a fraudulent scheme that had resulted in significant amounts of money being paid to companies controlled by him, and that his disclosure affidavit was deficient in many respects. Mr Rogalskiy was therefore ordered to attend before the court to be cross-examined on his affidavit in person or by video link.

Mr Rogalskiy appealed against the cross-examination order and applied to the Court of Appeal for a stay of the order pending the determination of the appeal. Whilst that application was pending, and in the absence of

agreement between the parties on the location for Mr Rogalskiy's cross-examination, Eurochem applied to the Commercial Court to fix the address for the cross-examination, suggesting its offices in Moscow. Mr Rogalskiy

objected to this proposal and in correspondence suggested that if a stay of the order was not granted, or his appeal failed, he would attend for cross-examination by video link in Geneva. The Court of Appeal subsequently granted a stay of the cross-examination order pending the determination of the appeal.

The Appeal

As Mr Rogalskiy's application challenging the jurisdiction of the BVI court was still to be determined, the appeal

proceeded on the basis that there had not been proper service of the proceedings on Mr Rogalskiy, and that he had not submitted to the jurisdiction of the BVI court. In addition, the Court of Appeal agreed that there was sufficient evidence to support the Commercial Court's preliminary findings that there was strong evidence of Mr Rogalskiy's involvement in a fraudulent scheme, and that his asset disclosure was deficient.

The Court of Appeal therefore considered the following issues:

• Jurisdiction – The power of the BVI court to order a foreigner who has not submitted to the jurisdiction to attend the BVI court sitting in the BVI or elsewhere to be cross-examined on his asset disclosure affidavit

given in compliance with an order of the court; and

• Discretion – If the court has jurisdiction to make a cross-examination order in these circumstances, how it should exercise its discretion in making the order.

Jurisdiction

The Court of Appeal said that it is now established beyond debate that the courts in England and the BVI have statutory jurisdiction to grant freezing orders together with ancillary orders relating to disclosure of a

defendant's assets. The relevant statutory provision in England is section 37(1) of the Senior Courts Act 1981. The equivalent provision in the BVI is section 24 of the Eastern Caribbean Supreme Court (Virgin Islands) Act (Cap. 80) (the Supreme Court Act).

Eurochem relied upon the decision of the English Court of Appeal in Motorola Credit Corpn v Uzan (No 2) [2004] 1 WLR 113, as authority for the proposition that the court had jurisdiction to order foreign defendants who were disputing the court's jurisdiction to attend for cross-examination on their assets. However, the Eastern Caribbean Court of Appeal declined to follow that decision because, in addition to section 37(1) of the Senior

Courts Act 1981, it had been decided on the basis of an additional statutory provision that does not have any equivalent in the BVI, namely, section 25 of the Civil Jurisdiction and Judgments Act 1982. That section allows an English Court to grant interim relief in aid of foreign proceedings.

The Court of Appeal held that the Commercial Court had erred in relying in part on rule 30.1 of the Civil Procedure Rules as a source of the court's jurisdiction to make orders for the cross-examination of deponents on asset disclosure affidavits. That rule only applies in a situation where a party intends to use an affidavit at a

trial or hearing and the opposing party wishes to cross-examine the deponent of the affidavit. Thus, the sole source of the court's power to order cross-examination on a disclosure affidavit is section 24 of the Supreme Court Act.



Although the Court of Appeal found that the BVI court did have jurisdiction in the strict sense to order cross-examination of a foreigner as a necessary part of its wide powers in policing freezing orders and making them effective, it held (at paragraph 39) that:

'… ordering a foreigner to attend for cross-examination on an affidavit that he gave in compliance with the court's order, whether in person in the BVI or by teleconference from his home country or another country, is an exercise of an exorbitant jurisdiction and has the potential of imposing the court's sovereignty on the foreigner … In the case of a foreigner who is challenging the court's jurisdiction, a cross-examination order could include issues of sovereignty and comity, as well as service and submission to the jurisdiction, both of which are disputed matters which are still outstanding in this matter, and impose significant inconvenience and expense on the foreigner … the settled practice and therefore wider jurisdiction of the court is not to issue a

cross-examination order against a foreigner who is disputing service and challenging the jurisdiction of the court.'

The Court of Appeal's finding that the BVI court did not have jurisdiction in the wider sense was sufficient to dispose of the appeal, but it nevertheless went on to consider how the discretion ought to be exercised if the position were otherwise.

Discretion

The Court of Appeal said that it is, 'clearly established by the authorities that ordering a person to be cross-examined on his asset disclosure affidavit is an exceptional order.' After referring specifically to two English authorities which concerned applications for cross-examination orders against persons resident within and subject to that court's jurisdiction, it held (at paragraph 42) that:

'The bar for getting such an exceptional order against a foreigner who has been served and has submitted to the jurisdiction must be much higher, and would be even higher for a foreigner who has not been served and is

disputing the court's jurisdiction. This, in my opinion, would make the granting of a cross-examination order against Mr. Rogalskiy, assuming the court has jurisdiction to make the order, not just a rare case but, to borrow an expression from the criminal law, "the rarest of the rare" case.'

The Court of Appeal noted that the United Kingdom Supreme Court in Abela v Baadarani [2013] 1 WLR 2043, had suggested that courts should adopt a more flexible approach to the issue of sovereignty in the context of service of proceedings outside the jurisdiction. However, the court held that Mr Rogalskiy's situation was far more serious. If he did not respond to the cross-examination order he could be held in contempt of court and

may be debarred from defending the claim until such time as he purged his contempt. If he responded to the order, it would mean leaving his own country and going to the BVI or elsewhere to be cross-examined. The

evidence before the court was that Eurochem had not obtained necessary authorisations from either the Russian or Swiss authorities to enable a video conference which is an essential step in ensuring that there is no encroachment on the sovereignty of those nations. It therefore concluded that the Commercial Court had given insufficient weight to the issue of sovereignty.

In addition, the Court of Appeal was not satisfied that the Commercial Court had dealt with the information to

come out of the cross-examination in a satisfactory manner. It considered the statement by Eurochem's counsel that the cross-examination would be highly relevant to the Contempt Application to be particularly significant. It also considered that the Commercial Court misdirected itself by suggesting that the cross-examination would enable the court to assess Mr Rogalskiy's credibility. It held that these are not proper aims of this type of cross-examination.

Accordingly, the Court of Appeal held that, even if there had been jurisdiction in the wider sense to make the

cross-examination order, the Commercial Court had erred in the exercise of its discretion in making the order. Mr Rogalskiy's appeal was therefore allowed and the cross-examination order was set aside.

Conclusion

The Court of Appeal's decision in Rogalskiy illustrates that, although the BVI court's jurisdiction to make

freezing orders carries with it the power to make whatever ancillary orders are necessary to ensure the effectiveness of freezing orders, that power is necessarily constrained by the court's territorial jurisdiction. If a

foreign defendant who has not submitted to the BVI court's jurisdiction does not adequately comply with his asset disclosure obligations under a freezing order, the claimant may be prevented from effectively policing the freezing order until such time as there has been submission to the jurisdiction of the court. In jurisdictions such as Russia where service may take many months, this may result in substantial delay with the consequential risk that undisclosed assets may be dissipated in the interim.



In order to get around this problem, it may be possible to obtain an ancillary freezing order (or similar relief) in the jurisdiction in which the foreign defendant is present, or alternatively, to obtain recognition and enforcement of the BVI freezing order. In cases where this is possible, it would be prudent to coordinate the

applications being made in the BVI and the foreign jurisdiction. In particular, the claimant may need to obtain permission of the BVI court to delay service and notification of the freezing order pending the application being made in the foreign jurisdiction.

More generally, the Court of Appeal's decision otherwise confirms that:

• cross-examination in aid of an asset disclosure order will be very much the exception rather than the rule; and

• such cross-examination should be limited to establishing assets for the purpose of the freezing order.

Contacts

Eleanor Morgan

Partner, BVI

+1 284 852 1712

[email protected]

Nicholas Fox

Partner, BVI

+1 284 852 1723

[email protected]

Shaun Folpp

Partner, Hong Kong

+852 3995 5729

[email protected]

Shane Donovan

Senior Associate, BVI

+1 284 852 1731

[email protected]

This update is only intended to give a summary and general overview of the subject matter. It is not intended to be comprehensive and does not constitute, and should not be taken

to be, legal advice. If you would like legal advice or further information on any issue raised by this update, please get in touch with one of your usual Mourant Ozannes contacts.

© 2017 MOURANT OZANNES ALL RIGHTS RESERVED


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Non-party costs in Cayman: the real loser must pay

Update prepared by Jonathon Milne (Counsel, Cayman Islands)

August 2017

The Grand Court has confirmed that, like the English Courts, it can vary the usual "loser

pays" costs rule and order a third party, who is not a named party in the litigation but

who has forced the issue of litigation for its own improper benefit, to pay some or all of

the costs incurred.

Mr Justice McMillan has provided useful commentary on the purpose and scope of the

Cayman costs regime generally. This is a prime example of improper conduct and an

abuse of process being castigated through the exercise of the Grand Court's discretion

in costs.

Background

As is well known, Primeo Fund (in Official Liquidation) (Primeo), acting through its Joint Official Liquidators (JOLs), issued proceedings in the Cayman Islands against Bank of Bermuda (Cayman) Ltd and HSBC Securities Services (Luxembourg) SA (together, the HSBC Defendants) alleging various breaches of duty in their

capacities as administrator and custodian of Primeo (the HSBC Litigation).

In the course of the HSBC Litigation, the HSBC Defendants compelled the JOLs, as opposed to Primeo as the plaintiff, to exercise liquidator's powers to obtain documents from EY Cayman (as Primeo's former statutory auditor) and, by extension, EY Luxembourg (which carried out certain fieldwork), so that any documents obtained could be disclosed to the HSBC Defendants in the HSBC Litigation. Unsurprisingly, the application

failed because the JOLs had no entitlement to such documents. In pressing the JOLs to make the application, the HSBC Defendants had confused two entirely separate regimes - discovery in civil litigation, and the powers

of liquidators to recover company property. This may sound familiar.

The Cayman Islands Court of Appeal (CICA) judgment in Pioneer

The CICA recently ordered costs against the HSBC Defendants in relation to another application instigated by the HSBC Defendants requiring the JOLs to seek disclosure of documents from third parties so they could be made available to the HSBC Defendants in the HSBC Litigation (please see our briefing here). Mr Justice Jones QC, the presiding trial judge in the HSBC Litigation and Primeo liquidation judge, acceded to the HSBC

Defendants' applications in relation to both Pioneer and EY Cayman documents.

He was overruled by the CICA in relation to the first example and, having ordered the JOLs to take certain steps, then recused himself due to a conflict in relation to the EY Cayman application. In both cases, Mr Justice Jones QC was found to be wrong. Both Mr Justice McMillan and the CICA were satisfied that the Primeo estate should not have to pay any of the costs incurred by the unsuccessful attempts by the HSBC Defendants to

circumvent the rules in order to obtain benefits for themselves.

Mr Justice McMillan noted that the HSBC Defendants' conduct had been described by the CICA as improper and abusive and such findings mirrored his own conclusion. As His Lordship confirmed, there was no conceptual or functional distinction to be made between the Pioneer case and the present one.


https://www.mourantozannes.com/news-and-views/updates/updates-2016/cayman-liquidators--use-of-discretionary-powers.aspx


The JOLs' arguments

In broad terms, the JOLs made the following arguments in support of an order against the HSBC Defendants for non-party costs:

1. The HSBC Defendants, and not the JOLs, were the real driving force behind the EY Cayman application. As the HSBC Defendants initially argued in written and oral submissions in seeking leave to appear, the application originated in applications which the HSBC Defendants made in the HSBC Litigation and the only reason it was issued was because of the HSBC Defendants’ desire to obtain further documents in discovery;

2. Both of the applications which the HSBC Defendants insisted that the JOLs took (either a letter of request process directed abroad, or an application against EY Cayman) were equally flawed because

they arose from the HSBC Defendants' improper conflation of two entirely separate regimes - the litigation and the liquidation regimes; and

3. The JOLs are experienced professionals who had concluded at an early stage that the application the HSBC Defendants were demanding was misconceived. The JOLs' decisions were well-reasoned and sensible, and the HSBC Defendants should have respected the autonomy and professionalism of their decisions. Consequently, they should not have to pay any of the costs incurred by the unsuccessful attempt by the HSBC Defendants to circumvent the rules in order to obtain a benefit for themselves.

The HSBC Defendants' arguments

In response, the HSBC Defendants argued that:

1. The costs of the EY Cayman application were not so exceptional as to come within the jurisdiction that allowed costs to be paid by non-parties;

2. The CICA ruling was neither binding nor persuasive as it only related to inter party costs and gave

neither consideration to the non-party costs jurisdiction nor guidance as to the applicable principles;

3. It was not open to the JOLs to seek a costs order requiring the HSBC Defendants to meet the JOLs' costs liability to EY, as an order for costs does not extend to indemnify a party from its liability to satisfy an adverse costs order to another party;

4. The HSBC Defendants never had substantial control of the application and were not the real parties; and

5. Despite having legal representation at all times, the HSBC Defendants submitted that they were not

warned that they might be subject to a non-party costs application.

Decision

In rejecting the HSBC Defendants' arguments, His Lordship confirmed that the Grand Court has a wide discretion to allocate costs in civil proceedings and there is no bar to an order for costs against a non-party in Cayman.

McMillan J accepted the JOLs' submissions and relied upon the leading Privy Council decision in Dymocks

Franchise Systems (NSW) Pty v Todd, emphasising two core principles in particular: (i) although costs orders against non-parties are to be regarded as “exceptional”, exceptional in this context means no more than outside the ordinary run of cases; and (ii) where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, the non-party will pay the successful party’s costs … [the party controlling or benefitting from the litigation is] himself … “the real party” to the litigation….



The HSBC Defendants claimed that the JOLs' application was unprecedented and unprincipled. However, as McMillan J confirmed, that view is unsupported by both case law, including CICA authority1, and established practice. Mr Justice McMillan accepted that non-party costs order are only exceptional in that they are outside

the ordinary run of cases. Although the JOLs technically lost the application, they were not the real losing party – the HSBC Defendants were - and, as His Lordship confirmed, this was not a loss to which any criticism of the JOLs should be attached. Accordingly, it was held that the HSBC Defendants must bear the JOLs' costs and any costs liability which the JOLs owe to EY as a result of the application.

The Grand Court agreed that the JOLs would not have made the application but for the HSBC Defendants demands requiring them to do so. Despite submissions from the HSBC Defendants to the contrary, the Grand Court held that the JOLs had not acted in any way that was unreasonable, disproportionate or which was

frankly even avoidable. His Lordship confirmed that the HSBC Defendants caused and were exclusively responsible for the proceedings in question. He stated definitively that no other conclusion may be drawn. In those circumstances, fairness dictated that the Primeo estate should not have to bear any of the costs of the unsuccessful application driven by the HSBC Defendants.

Such was the degree of impropriety by the HSBC Defendants, in connection with the award of EY's costs, His Lordship made clear that the circumstances in this case were highly exceptional and he stated that there was no justification for EY being left out of pocket to any degree at all. Therefore, the Grand Court chose to

exercise its discretion and award indemnity costs in favour of EY, such costs being payable by the HSBC Defendants.

Conclusion

The judgment makes clear that the Grand Court has a wide discretion in relation to costs and will apply principles of fairness in exercising that discretion. Where parties abuse the court process or use improper

conduct to take advantage of a particular set of circumstances, the Grand Court will not hesitate to admonish that behaviour.

Non-parties are not immune from costs orders simply because they are not formally named as a party. Consistent with English authorities, the Grand Court will look to the 'real' party to the proceedings and make an

order to the effect that the 'real' loser must pay.

1 (see Kenney and CC International Limited v Ace Limited [2015] CILR 367).



Contacts

Peter Hayden

Managing Partner, Cayman Islands

+1 345 814 9108

[email protected]

Christopher Harlowe

Partner, Cayman Islands

+1 345 814 9232

[email protected]

Jonathon Milne

Counsel, Cayman Islands

+1 345 814 9127

[email protected]









Confirmation: dissenting shareholders are entitled to interim payments

Update prepared by Rocco Cecere (Counsel, Cayman Islands) and Jessica Bush (Associate, Cayman Islands)

August 2017

The Grand Court has confirmed its previous decision that it has jurisdiction to order

that a company subject to a "fair value" proceeding pursuant to section 238 of the

Companies Law make interim payments to dissenting shareholders. This decision has

a significant impact on other cases before the Court and on fair value determinations in

the Cayman Islands generally.

Background

As we have previously reported, where a company merges or consolidates under Part XVI of the Companies

Law (2016 Revision) (as amended) (the Law), shareholders dissatisfied with the price offered by the company for their shares may dissent from the transaction and in so doing lose their rights as shareholders except the right to be paid fair value for their shares.1 Unless the company and dissenting shareholders are able to agree on a price to be paid for the dissenting shareholder's shares, the company must (and a dissenting shareholder may) file a petition in the Grand Court seeking the determination of the fair value of its shares. There are currently a number of "fair value proceedings", or "section 238 proceedings" as they are also known, before the Grand Court.

Pending the outcome of the Court's fair value determination, a dissenting shareholder is deprived of the price of its shares while the company has the benefit of the use of that money.2 As we reported in Section 238 fair value determinations: more guidance from the Court in the case of Qihoo, the Honourable Mr Justice Quin determined that the Court had jurisdiction to order that a company make interim payments to dissenting shareholders who were effectively being kept out of the money in the period between the commencement of the proceedings and the ultimate determination of fair value at trial.

The question has recently been addressed again in another set of section 238 proceedings in a hearing before

the Honourable Justice Mangatal. In Re Qunar Cayman Islands Limited3 (Qunar) (unreported, 8 August 2017), two dissenting shareholders, funds managed by Maso Capital (the Dissenters), sought interim payments at the same amount as the merger consideration on the basis that Qunar Cayman Islands Limited (the Company) had consistently maintained that the merger consideration constituted fair value for the shares in the Company. In response to that application, the Company invited the court to overturn the decision in Qihoo on the basis that it considered the decision to be wrong and should not be followed. The Court distilled the application into

three main issues:

Does the Court have jurisdiction to award interim payments in section 238 proceedings?

If the Court does have that jurisdiction, should it exercise its discretion to do so?

1 Dissenting shareholders are however afforded rights by the Law as to participation in any proceedings to determine the fair value of their

shares and as to obtaining relief on grounds that the merger or consolidation is void or unlawful. 2 This was recognised in Maso Capital Investments Limited & Ors v Qihoo 360 Techonology Co. Ltd (unreported, 26 January 2017) (Qihoo) at

para 67 relying on the dicta of Jones J in In the matter of Integra Group (unreported, 28 August 2015) (Integra). 3 Maso Capital Investments Ltd et al v Qunar Cayman Islands Limited (unreported, 8 August 2017).


https://www.mourantozannes.com/news-and-views/updates/updates-2017/section-238-fair-value-determinations---more-guidance-from-the-court.aspx

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Was there a sufficient evidential basis upon which the Court could decide what constituted a "just

sum"?

Does the Court have jurisdiction to award interim payments in fair value proceedings?

Order 29, rule 12(c) of the Grand Court Rules (1995 Revision) gives the Court the power to award interim payments of such amount as it thinks just if "the plaintiff would obtain judgment against the defendant for a substantial sum of money apart from any damages or costs".4

The Company argued that the interim payment regime in Order 29 did not apply to fair value proceedings on the basis that the remedy available to the dissenting shareholders is merely a declaration as to the fair value of

the company's shares (and interest), rather than an order for payment of that sum. While the Company accepted that section 238 undoubtedly created a liability in favour of the Dissenters, it submitted that the only remedy afforded by the statutory scheme was a declaration as to fair value (and not a money judgment which could form the basis of an application for interim payments). The Company further argued that the fair value regime is a stand-alone statutory code and ordering interim payments would be inconsistent with this regime.

The Dissenters, in reliance on the decision in Qihoo, argued that the Court does have jurisdiction to order interim payments in section 238 proceedings. In particular, the Dissenters argued that the Grand Court should

follow Qihoo unless convinced it was wrongly decided by Quin J.5 Further, the Dissenters submitted that the argument raised by the Company that fair value proceedings only provide declaratory relief was overly technical, as the two fair value proceedings which have gone to trial in this jurisdiction have resulted in orders by the Court for sums of money to be paid by the relevant company to the dissenting shareholders.6

Mangatal J, in agreement with the Dissenters, was not convinced that Quin J was wrong as his reasoning was very clear and was made following fully contested arguments from the parties. In the circumstances, she

considered that she ought to follow Quin J's decision and held that the Grand Court does have jurisdiction to award interim payments in fair value proceedings. The learned judge also considered that the Company's submission that fair value proceedings only provide declaratory relief was problematic, in that, if a company does not act upon the declaration (i.e. by paying the dissenting shareholders fair value for their shares) and separate enforcement proceedings were needed, it would have the undesirable consequence of multiplicity of law suits and increased costs.

Should the Court exercise its jurisdiction? If so, what is a "just sum"?

The Company argued that the Court should decline to exercise its discretion to order interim payments as there was:

no evidence as to what a "just sum" would be in the circumstances as no expert evidence had been filed by the Dissenters; and

the Court could not be satisfied as to the ability of the Dissenters to repay the balance of any interim

payments ordered if the fair value of the shares was ultimately determined to be less than the merger price.

The Court rejected both of these arguments, noting that the Company had told the world, including its regulators, that it would contend in the proceedings that fair value is the merger price.7 The Court agreed with the Dissenters that "what the Company says about fair value must… count for something". While there is no presumption that the merger price is fair value, the Court held that a just amount for the Company to pay by

way of interim payments should be "predicated on the basis of what the Company has maintained is the fair

value".

4 Also see the Grand Court Law (2015 Revision), section 20. 5 Following the authority in Lornameade Acquisitions Ltd v Kaupthing Bank HF [2013] 1 BCLC 73 and China Shanshui Cement Group Limited

2015 (2) CILR 255. 6 Integra and In the matter of Shanda Games Limited (unreported, 25 April 2017). 7 The Company had, on numerous occasions, contended that the merger price is fair value, including in the agreement and plan of merger and

the Company's proxy statement.



Mangatal J held that, in determining whether to order interim payments and the amount of such payments, the Court was not (as suggested by the Company) pre-empting the Court's fair value determination. Rather, the Court's task is to determine what is just as between the company and the dissenters. Mangatal J held that the

purpose of the interim payment jurisdiction is to mitigate the hardship or prejudice suffered by dissenters being kept out of the money between the commencement of the proceedings and the determination and payment of fair value for their shares.

Furthermore, if the fair value at trial is ultimately found to be less than the merger price, the Court has the ability to re-tilt the scales and adjust interim payments by ordering repayment of any overpayment plus interest. In this way the Company can be compensated if it is later established, with the benefit of hindsight, that it was deprived of a portion of an interim payment.

Mangatal J also saw no substance in the Company's concern that the Dissenters may not be able to repay any interim payments ordered should the final determination as to fair value be less than the merger price. The learned judge also rejected the Company's argument that the Company's estimated costs of the proceedings should be deducted from any interim payments ordered on the basis that she saw no basis for such an argument, either on the construction of the language of the relevant rules or as a matter of principle.

Accordingly, the Court ordered the Company to pay interim payments equal to the merger price multiplied by the number of shares held by the respective Applicants.

Conclusion

Consistent with the approach adopted by Quin J, Mangatal J has confirmed the Grand Court's jurisdiction to order interim payments to be paid to a dissenting shareholder pending the determination of the fair value of a company's shares. In circumstances where a company has told the world at large that fair value is the merger price, it is just that a dissenting shareholder be paid that sum to avoid any hardship when it is effectively being

kept out of its own money.

Mourant Ozannes acted as attorneys for the Dissenters, together with Mr Robert Levy QC as lead counsel, in these proceedings.

Contacts

Christopher Harlowe


+1 345 814 9232

[email protected]

Shaun Folpp

Partner, Hong Kong

+852 3995 5729

[email protected]

Simon Dickson


+1 345 814 9110

[email protected]

Rocco Cecere


+1 345 814 9218

[email protected]

Jessica Bush

Associate, Cayman Islands

+1 345 814 9132

[email protected]











Fair value update: consent means consent

Update prepared by Rocco Cecere (Counsel, Cayman Islands) and Tisha Hobden (Knowledge Management, Cayman Islands)

August 2017

A party who agrees to make an interim payment in a fair value determination pursuant

to s. 238 cannot back out of the agreement, and the court will give effect to terms

agreed between parties in such circumstances.

Mr Justice Segal of the Cayman Islands Grand Court recently rejected an application challenging the validity of a consent order providing for certain interim payments. The consent order was made in connection with a petition under s. 238 of the Companies Law (2016 Revision) (as amended) (the Companies Law), pursuant to which the Petitioner, Trina Solar Ltd (Trina), sought an order determining the fair value of the shares of two shareholders who dissented from its merger transaction (the Dissenters). The Dissenters are funds which are managed by Maso Capital.

In doing so, Segal J emphasised that a party who agrees to make an interim payment in s. 238 proceedings

cannot back out of that agreement, and the court will give effect to terms agreed between parties.

Background

In March 2017, Trina merged with another Cayman Islands exempted company pursuant to the statutory merger regime set out in Part XVI of the Companies Law. The Dissenters dissented from the merger, and when they were unable to agree a price for their shares with Trina within the statutory negotiation period, Trina

petitioned for a determination of the fair value of the shares by the Grand Court. Prior to the hearing of the fair value petition, Trina and the Dissenters agreed in a consent order (the Order) that Trina would make certain interim payments to the Dissenters by a certain date; however, those payments were never made.

Trina's reasons for non-payment

Notwithstanding that Trina had, on legal advice, agreed to the terms of the Order and instructed its attorneys

to sign on its behalf, it refused to make the interim payments. Trina told the court that some of its stakeholders had refused to permit the interim payments on the basis that those stakeholders had learned of two other cases pending before the court which were considering whether the court had jurisdiction to order interim payments in s. 238 proceedings.1 Trina then belatedly challenged the validity of the consent order,

claiming it was defective and invalid, and in the alternative, sought relief from any sanctions to which it would otherwise have been subject for breaching the Order.

1 In the matter of Qunar Cayman Islands Limited and In the matter of Eurasia Drilling Company Ltd. The decision in Qunar, in which the

Dissenters also appear, is eagerly anticipated and expected to be released in the coming weeks.



In support of its position, Trina argued that the Order should be set aside because the court did not have jurisdiction to make it. Trina submitted the court may only make an order for an interim payment pursuant to GCR Order 29 following the issuing of a summons and the filing of evidence in support of the summons. 2 In this

matter, the Order was expressed to be made pursuant to Order 42, rule 5A and no summons was issued.3 Trina argued in the alternative that even if the court did have jurisdiction to make an order for interim payments where a summons had not been issued, there was no jurisdiction to make the Order because it was expressed to have been made pursuant to Order 42, rule 5A and Trina submitted that the rule did not apply to interim payments.

Further, Trina submitted there was no binding contract between it and the Dissenters under which it agreed to make the interim payments. Even if the court found there was a contract, that contract was void due to a

common mistake of law on the part of both parties who erroneously believed the court had the jurisdiction to grant interim payments by consent. In the alternative, if the Order was properly made, Trina asked the court to grant it relief from the consequences of its decision to breach the Order.

The Dissenters' arguments

Leading counsel for the Dissenters asked the court to reject all of Trina's arguments and to treat many of the

explanations for failure to comply with the Order as 'inherently incredible.' In particular, the Dissenters argued:

the court has jurisdiction to issue a consent order without a summons being issued

even if a summons should have been issued, failure to do so was merely an irregularity addressed by GCR Order 2, rule 1 which did not affect the validity of the Order; 4 and

Trina was clearly contractually bound to make the interim payments and the circumstances relied upon by Trina did not justify the granting of relief.

The Ruling

Segal J rejected all of Trina's arguments. Specifically, the learned judge found that the court has jurisdiction to

make a consent order in proceedings which are before it. The interim payment jurisdiction is ancillary to and arises within such proceedings. In the absence of agreement between the parties, a summons would have been needed, but in this case the parties were in agreement and the judge approved the Order containing the terms

of their agreement, making it binding on them. Segal J found there was nothing unique in the interim payment jurisdiction which would prohibit the court making an order where the parties had agreed that order's terms between themselves. The learned judge found that on the basis that the parties were in agreement and the order was appropriately drafted (making the time for and consequences of payment perfectly clear), that it was appropriate to sign and make the order in circumstances where the jurisdiction issue had not been raised when he was presented with the order for signing.

Segal J also held that the Dissenters were correct on the application of GCR O.2, r.1 (i.e. that a failure to issue

a summons is an irregularity which would not nullify an application). Further, the parties reached a binding agreement as evidenced and formalised in the Order. Even if the Order was defective, Trina was still contractually obliged to make the interim payments as Segal J considered that there was a binding agreement which was independent of the Order.

In closing, Segal J made two additional points, namely: that he made no comment as to the challenges to the

court's jurisdiction to make interim payments raised in Qunar and Eurasia as that issue was not before him; and that he took Trina's summons seeking, inter alia, a declaration that the Order was defective as Trina's

2 GCR Order 29, Part II, deals with interim payments. 3 GCR Order 42 deals with requirements relating to judgments and orders; Order 42, rule 5A deals with consent orders. 4 GCR Order 2, rule 1 states that a failure to comply with the GCR at the outset of proceedings shall be treated as an irregularity and shall not

nullify the proceedings, any step taken in the proceedings, or any document, judgment or order therein.



consent, as required by O. 29, r. 15, that the fact that an interim payment had been made could be communicated to him as the trial judge.5

Conclusion

Whilst Segal J's decision is unsurprising, it is reassuring that the court upheld the consent order agreed between Trina and the Dissenters. When parties enter into a contract or agree a consent order with an opponent, it is important that they have confidence that the court will enforce the promises made in the event of a dispute, and will not be swayed by technical arguments designed to permit a party to avoid fulfilling those promises. The decision sends a clear message that a company who agrees to make an interim payment in a s.

238 context cannot subsequently refuse to do so without facing the usual consequences following a breach.

The Dissenters have also brought a winding up petition against Trina, asserting that the outstanding interim payments represent debts which are undisputed, due and payable. They seek an order that Trina be wound up on the basis that it is insolvent, or in the alternative, that it is just and equitable that it should be wound up.

5 O. 29, r. 15 provides that unless the defendant consents there should be no communication of the fact that an interim payment has been

made (either voluntarily or pursuant to an order) at trial or at any hearing until all questions of liability and amount have been determined.



Contacts

Alex Last


+1 345 814 9243

[email protected]

Christopher Harlowe


+1 345 814 9232

[email protected]

Paul Christopher

Managing Partner, Hong Kong

+852 3995 5700

[email protected]

Shaun Folpp

Partner, Hong Kong

+852 3995 5729

[email protected]

Simon Dickson


+1 345 814 9110

[email protected]

Rocco Cecere


+1 345 814 9218

[email protected]

Jennifer Maughan

Senior Associate, Hong Kong

+852 3995 5747

[email protected]

Jessica Bush


+1 345 814 9132

[email protected]














A new era of intellectual property protection in the Cayman Islands

Update prepared by Hector Robinson QC (Partner, Cayman Islands) and Jaclyn Mannheim (Paralegal, Cayman Islands)

July 2017

The Cayman Islands is modernising its intellectual property regime. The new Trade

Marks Law 2016, the Design Rights Registration Law 2016 and the Patents and Trade

Marks (Amendment) Law 2016 will all come into force on 1 August 2017. The Copyright

(Cayman Islands) Order 2015 and the Copyright (Cayman Islands) (Amendment) Order

2016 also came into effect on 30 June 2016, bringing the Island's copyright law in line

with modern requirements. This update considers the intellectual property regime in

the Cayman Islands as of 1 August 2017.

Trade Marks

Previously, trade mark law in the Cayman Islands operated as an extension of the UK trade mark regime and the rights associated with a UK or EUIPO registration were simply extended to trade marks on the Island. The Trade Marks Law 2016 (the New Law) creates a stand-alone trade mark regime where only national applications made by local registered agents will be accepted. The Cayman Islands Intellectual Property Office

(CIIPO) will maintain a local register of trade marks and it will no longer be a requirement for the trade mark to be registered in the UK in order to obtain protection in the Cayman Islands.

Trade mark applications under the New Law:

Trade mark applications must be based on the Nice system, which is an internationally recognised system for classifying goods and services for the purposes of trade mark registration. The applications will be examined by the Registrar for Patents and Trade Marks, who will determine whether the trade mark in question satisfies the requirements of the New Law. Where the Registrar decides the requirements for registration are not met, the

Registrar will offer the applicant the opportunity to amend the application, and eventually determine whether or not to accept the application. The Registrar may refuse to register the trade mark on both absolute and relative grounds.

There is no use requirement and trade mark rights cannot be revoked or challenged on the basis of non-use. There is no right of priority for marks registered in other jurisdictions and there is no protection for well-known or famous marks.

Once the examination process is complete, the application will be published in the Intellectual Property Gazette

and interested parties will have 60 days from the date of publication to oppose the application. To prevent or resolve any opposition, the applicant may disclaim rights to the exclusive use of any particular word or element of the trade mark, leaving it open to others to use the disclaimed word or element.

The registration certificate will be issued immediately after the 60 day publication period provided there is no successful opposition to the application. The projected turnaround time for the application and registration process is 3-6 months from the date of receipt of the application. The proprietor's rights in respect of the trade

mark will start with the date of filing the application.

Trade Mark registrations will be valid for 10 years from the date of filing the application. Annual fees will continue to be payable under the New Law. Annual fees are due on 1 January and must be paid on or before 31



March of each year. If annual fees are not paid, the trade mark will be held in abeyance and will be unprotected from infringement until the outstanding fees and prescribed penalty for late payment have been paid.

Transitional provisions:

Existing trade marks registered prior to 1 August 2017 will continue to be protected as if they were registered under the New Law and the next renewal dates for these trade marks will remain unchanged. As it will not be possible to register series marks under the new law, series marks registered prior to 1 August 2017 will retain protection until the next renewal date, after which the marks will have to be individually registered.

Design Rights

Pursuant to the Design Rights Registration Law 2016, the owners of UK registered designs and registered EU

Community designs may extend their rights to the Cayman Islands. Applications for registration of design rights must be made via a local registered agent. The application must contain all the particulars of the UK or EU registered design and the registration fee. The registration and validity period in Cayman will mirror the UK/EU registration and the owner will hold all the equivalent rights available in those jurisdictions.

Annual fees for design rights will be due on 1 January and must be paid on or before 31 March of each year. If

annual fees are not paid, the design rights will be held in abeyance and the design will be unprotected from infringement until the outstanding fees and prescribed penalty for late payment have been paid. Annual fees

that remain unpaid for an extended period of time will leave the design right liable to cancellation by the Registrar.

Patents

Under the pre-existing Patents and Trade Marks Law 2011 (Principal Law) an owner of a patent right in the UK or EU may apply to have these rights extended to and mirrored in the Cayman Islands. The Patents and Trade Marks (Amendment) Law 2016 (Amendment Law) removes all references to trade marks under the

2011 law, making way for the new trade mark regime, but maintains the existing legislative structure for patent protection.

Anti-trolling provisions:

The Amendment Law implements anti-trolling provisions to prevent abuse of the patent registration process by patent trolls, who hold and vexatiously enforce patents in order to profit through licensing and litigation.

The Amendment Law inserts a new section 15A into the Principal Law which provides that a person shall not

make an assertion of patent infringement in bad faith. Further, the Court shall not recognise and enforce a

foreign judgment or give effect to an estoppel based on a foreign judgment insofar as the claim is based on an assertion of patent infringement made in bad faith. Aggrieved parties may bring an action in the Grand Court of the Cayman Islands or issue a counter claim in any enforcement proceedings brought in bad faith.

Copyrights

The Copyright (Cayman Islands) Order 2015 and the Copyright (Cayman Islands) (Amendment) Order 2016

(New Copyright Orders) extend Part 1 of the UK Copyright, Designs and Patents Act 1988 (as amended) to the Cayman Islands, subject to certain exclusions and modifications in the application of Part 1.

The New Copyright Orders have brought copyright protection in the Cayman Islands in line with the digital age by broadening the types of works protected and expanding the range of restricted acts. The new orders have also provided greater enforcement remedies for copyright holders who can apply to the courts to seize infringing work and can institute a claim for damages or apply to the Customs Department to have infringing goods seized on their way into Cayman.

Copyright protection is automatic upon the creation of an original work. The duration of the protection depends upon the type of work and can range from 25 years to 70 years.

Conclusion

The new suite of legislation discussed above represents a major milestone in intellectual property protection in the Cayman Islands, ensuring that both local and foreign entrepreneurs, businesses and creative individuals can effectively protect their intellectual property.

Mourant Ozannes is a registered intellectual property agent affiliated with CIIPO and is able to advise on intellectual property related queries and transact on behalf of its clients in the application and registration of intellectual property rights.



Contacts

Hector Robinson QC


+1 345 814 9114

[email protected]

Nicosia Lawson


+1 345 814 9213

[email protected]

Jaclyn Mannheim

Paralegal, Cayman Islands

+1 345 814 9192

[email protected]









Not merely shadowy figures – In Re Exten Investment Fund et al

Update prepared by Christopher Harlowe (Partner, Cayman Islands), Christopher Levers (Senior Associate, Cayman Islands) and Tisha Hobden (Knowledge Management, Cayman

Islands) July 2017

This decision represents the first time the wording of s. 151(3) of the Companies Law

in its current form has been considered by the Cayman court. It confirms that Cayman

will adopt the generous approach taken in other commonwealth countries on the issue

of who is considered to be interested in deferral applications. The decision also informs

the definition of a contingent creditor in the context of who can present a winding up

petition and apply for a supervision order.

The Petitioner, Credit Suisse London Nominees Ltd, was the sole investor in two funds (the Funds) prior to its shares being compulsorily redeemed when the Funds were placed into voluntary liquidation. The managers of the Funds (the Managers, together the Companies) were also placed into voluntary liquidation.

The Petitioner applied to defer the Companies' dissolution date, and sought a supervision order in respect of the Funds on the basis that an investigation into the affairs of the Companies was needed. The voluntary

liquidations of the Companies had been completed in only a week against a backdrop of extensive correspondence from the Petitioner raising various unanswered questions and requesting information regarding the operation of the Funds. In particular, certain suspect payments had been made by the Managers, and the Petitioner considered that an independent investigation by official liquidators was necessary to determine whether the Companies had any claims arising from those payments. The Petitioner wanted to defer the dissolution date of the Companies so all of these issues could be resolved prior to terminating the Companies' existence.

Standing

At the outset, the voluntary liquidator (the Liquidator) challenged the standing of the Petitioner to bring the deferral applications on the basis that it lacked sufficient interest in the deferral to do so.

Mangatal J considered the meaning of the phrase 'any person who appears to be interested' in s. 151(3)1 of the Companies Law (the Law). In the absence of Cayman Islands authority considering s. 151, she relied upon English jurisprudence considering the similarly drafted s. 352(1) of the UK Companies Act 1948. In doing so, she adopted the approach taken by Megarry J in Re Test Holdings2 that the phrase 'any person who appears to

be interested' is one of great amplitude and, provided the interest was 'not merely shadowy'3, it would be sufficient to establish standing for the present purpose.

1 Which states:…the Court may, on the application of the liquidator or any other person who appears to the Court to be interested, make an order deferring the date at which the dissolution of the company is to take effect to such date as the Court thinks fit. 2 Re Test Holdings (Clifton) Ltd: Re General Issue and Investment Co Ltd [1969] 3 All ER 517 3 Per Meggary J in Re Wood and Martin (Bricklaying Contractors) Ltd [1971] 1 All ER 732, at 736



In her view, the Petitioner, as the sole economic stakeholder in the Funds, and as the party entitled to ultimately benefit from any potential recoveries made in respect of the suspect payments, had clearly established itself as having a sufficient interest, for the purposes of s.151(3), in the deferral of the dissolution

of the Companies. It was not a question of the Petitioner showing it had a pecuniary or proprietary interest in the Companies, rather, it had to demonstrate an interest in resuscitating the Companies, and had convincingly done so.

Deferral

Mangatal J then considered the application to defer the dissolution date of the Companies. Reference was made to the Hong Kong Companies Ordinance4, which is also in substantially similar terms as s. 151 of the Law. Mangatal J relied upon a couple of Hong Kong decisions5 which held that deferring the dissolution of a company

is justified where some aspect of the company's business has not been concluded. The question of deferral should be considered in the context of what is hoped and what is likely to be achieved by deferring the dissolution. Importantly, she accepted that, if it appears that it is in the public interest for certain matters to be investigated, deferral is justified.

The deferral was granted on the grounds that:

• it was clear the Companies had unfinished business, namely the investigation into the matters raised by the Petitioner in its correspondence and the possible pursuit of claims in connection with the suspect payments;

• the Companies would not be able to pursue recoveries in relation to the suspect payments if they were dissolved;

• it was in the public interest that past wrongs be investigated and appropriate action taken;

• the Petitioner was willing to fund the liquidations despite the fact that it had already suffered losses,

indicating its commitment to investigate outstanding matters; and

• importantly, no party would suffer any detriment as a result of the deferral.

Application for Court Supervision of the Liquidation of the Funds The application for court supervision was made only in respect of the Funds (as the Petitioner accepted it did

not have standing to make such an application in respect of the Managers) and upon the following grounds:

• granting the application would enable the JOLs to require delivery up of documents and property belonging to the Funds or to examine any relevant person pursuant to s. 103 of the Law6;

• the JOLs could apply to issue a letter of request to obtain the assistance of a foreign court if needed; and

• the proposed appointees were appropriate because they had the geographic coverage and experience necessary to conduct the kind of investigation called for in this case and were wholly independent, having had no prior dealings with the former management of the Companies.

In opposition, the Liquidator submitted that a petition under s. 131 could only be issued by a voluntary

liquidator, contributory or creditor, and that the court lacks jurisdiction to grant a supervision order on the application of any other class of person. It argued the Petitioner was not a creditor of the Funds. It never submitted a proof of debt in the liquidations of the Companies, and any rights it had as a former redemption creditor ceased on the date of payment of the redemption proceeds. Further, the Liquidator did not consider the Petitioner to be a contingent creditor, because it had not adduced evidence of a claim which would amount to a provable debt within the meaning of s. 139 of the Law.

Mangatal J reviewed s. 94 of the Law, which sets out the categories of persons who can present a winding up petition, including contingent creditors7. She ultimately took the view that, given the allegations surrounding

4 S. 248(4), Cap 32 5 The Commission of Inland Revenue v Fullbright Co Ltd HCCW 208/2008 and Kelso Enterprises Ltd v Liu Yiu Keung CACV 303/2006 6 S 103 provides for the examination of relevant persons, including a company director or a professional service provider



the payments made by the Managers, and the fact that the Petitioner was the sole investor in the Funds and may ultimately become entitled to the benefit of any repayment, it could be considered a contingent creditor.

Further, given the wide scope of the language in s. 131, she held that the word 'creditor' can be construed to

include contingent creditors, so a contingent creditor may apply for a supervision order. For these purposes, she considered it unnecessary for the Petitioner's claim to exist as a provable claim in order to fall within the scope of s. 131.

Accordingly, given the existence of valid reasons for pursuing investigations into the Funds' affairs which could lead to legal action in relation to the suspect payments, she granted the Petitioner's application and made a supervision order in respect of the Funds. However, she dismissed as premature a request for the JOLs to have power to litigate in the names of the Funds pending a thorough investigation of the facts. She did however

grant the JOLs power to apply to court for a supervision order in respect of the Managers. The Petitioner had initially refrained from making such an application in respect of the Managers because it was neither a contributory nor a direct creditor of the Managers. Notwithstanding this, it had been envisaged from the outset that if supervision orders were granted in relation to the Funds, the JOLs would then consider whether to cause

the Funds, as creditors or contingent creditors of the Managers, to apply to bring their voluntary liquidations under court supervision.

Conclusion

This decision represents the first time the wording of s. 151(3) of the Law in its current form has been considered by the Cayman court. Happily, there was sufficient jurisprudence from other jurisdictions to enable the judge to make a well-informed decision based upon legal precedent, confirming that Cayman will adopt the generous approach taken in other commonwealth countries on the issue of who is considered to be interested in deferral applications.

The decision also informs the definition of a contingent creditor in the context of who can present a winding up

petition and apply for a supervision order. In so finding, Mangatal J acknowledged that this was not a clear cut case, but that on balance, the Petitioner was indeed a contingent creditor because of its potential to make recoveries provided the process of liquidation was allowed to properly run its course.

7 S 94(1)(b)



Contacts

Christopher Harlowe


+1 345 814 9232

[email protected]

Christopher Levers

Senior Associate, Cayman Islands

+1 345 814 9249

[email protected]

Tisha Hobden

Knowledge Management, Cayman

Islands

+1 345 814 9223

[email protected]









In re NBRL Global Ltd

Update prepared by Hector Robinson (Partner, Cayman Islands), Christopher Levers

(Senior Associate, Cayman Islands) and Tisha Hobden (Knowledge Management, Cayman Islands)

July 2017

In a recent decision, the Grand Court refused to make a winding up order after hearing

a petition based on disputed allegations that the relevant company was unable to pay

its debts. The decision is a timely reminder that where there is no live evidence of

deponents, the court will disregard allegations which have been credibly denied and

rely solely upon undisputed facts.

In a recent decision, the Grand Court of the Cayman Islands refused to make a winding up order after hearing a petition based on disputed allegations that the relevant company was unable to pay its debts. In his ruling, Parker J provided helpful guidance, not only with respect to the evidence which a petitioner is required to

adduce in order to discharge its evidential burden, but also with respect to the operation of the solvency test in Cayman.

Facts

The Petitioner, Learn Capital Venture Partners III LP, brought a winding up petition against NBRL Global Ltd (NBRL) on the basis that it was unable to pay its debts. The Petitioner was a creditor and contributory of NBRL.

The Petitioner alleged that NBRL had a number of outstanding debts, each of which was due and payable, with the result that NBRL was unable to pay its debts due to its admittedly poor cash position. The Petitioner argued

that the debts should be deemed 'due and payable' despite various deferral agreements in place with NBRL's creditors.

In opposition, NBRL contended that none of the debts were due and payable, either because (a) the creditors had agreed to defer payment or (b) in one instance, there was a bona fide dispute regarding the existence of the debt. NBRL further contended that, based upon its projected cash position, by the time the deferred debts

became due, there would be sufficient cash to satisfy them.

Decision

In reaching his decision to dismiss the Petition, Parker J had to consider two issues which routinely confront the courts on petitions based upon a company's insolvency: (a) what does an inability to pay debts actually mean and (b) what evidence is required to demonstrate such an inability.

NBRL's solvency

At the outset, Parker J affirmed that the insolvency test in Cayman is cash flow insolvency, or the inability to pay debts as they fall due. He also confirmed the dicta of the Cayman Islands Court of Appeal in SEB AB (Publ) v Conway and Walker (as JOLs of Weavering Macro Fixed Income Fund Ltd1) that:

'the cash flow test in the Cayman Islands is not confined to consideration of debts that are immediately due and

payable. It permits consideration also of debts that will become due in the reasonably near future.'

1 unreported, CICA No. 2 of 2016, at paragraph 40.



Court's approach to the evidence

Parker J noted it was inappropriate to resolve difficult factual disputes at a petition hearing.2 Accordingly, he

adopted the approach espoused by Lord Templeman in Tay Bok Choon3 and confirmed that, in circumstances where there was no live evidence or cross-examination of the deponents, the Court would ignore any disputed allegations which had been 'credibly denied' and rely solely on undisputed facts.

Parker J found NBRL's evidence to be credible despite admitting that parts of it were confusing. The Petitioner, on the other hand, had not adduced evidence in relation to the disputed debt or the deferral agreements entered into by NBRL with its other creditors and, in absence of such evidence, Parker J accepted NBRL's evidence because 'it is not the function of this Court to reject sworn evidence … save in exceptional

circumstances.'

Accordingly, on the evidence before him, Parker J found the Petitioner failed to prove that NBRL was insolvent.4 He was persuaded that:

• part of the debt was genuinely disputed by NBRL

• it is not the function of the court to determine the validity of disputed debts, and

• the Petitioner failed to show that, on a balance of probabilities, NBRL would have been unable to pay its debts as they fell due.

Although Parker J agreed with the Petitioner that the debts were 'due and payable' as the deferral agreements did no more than postpone payment deadlines, Parker J ultimately held that the Petitioner had not demonstrated NBRL would be unable to pay the deferred debts at the end of the deferral period. NBRL had adduced evidence that its cash position would improve considerably in the coming months and this was not convincingly challenged by the Petitioner.

On that basis, Parker J dismissed the Petition.

Parker J went on to say that even if he had been persuaded of NBRL's insolvency, he would have exercised his discretion to refuse the petition on the following grounds:

• the petition was peculiar in that it was presented by a major creditor of NBRL, who refused to accept repayment of its debt

• no other creditors supported the petition

• winding up should only be used as a last resort and the court should take care not to have its jurisdiction used for tactical purposes or to resolve stakeholder disputes, and

• it was by no means clear that the broader stakeholder base of NBRL would benefit from the appointment of liquidators. Whilst that result may appear optimal from the Petitioner's stance, there were many commercial variables at play and, objectively viewed, it could be just as advantageous for NBRL to continue to be run by its board.

Conclusion

The decision is a timely reminder of how the court will approach a winding up petition based on credibly

disputed evidence of the company's insolvency. Unless there is undisputed evidence of a company's insolvency, the Cayman court will likely refuse a winding up order where there is no oral evidence on behalf of those opposing the petition, nor cross-examination of the petitioner's witnesses.

2 Re Parmalat [2008] UKPC 29. 3 [1987] 1 WLR 413, see paragraphs 418-419. 4 In so doing, he reminded the parties that it was the Petitioner who bore the burden of proving insolvency and that a company is not required

to prove its own solvency.



Contacts

Hector Robinson QC


+1 345 814 9114

[email protected]

Christopher Levers

Senior Associate, Cayman Islands

+1 345 814 9249

[email protected]

Tisha Hobden

Knowledge Management, Cayman

Islands

+1 345 814 9223

[email protected]









Cyber security: the evolving nature of a director's duty

Update prepared by Tina Asgarian (Senior Associate, Guernsey) September 2017

With the increasing frequency of cyber-attacks, failing to properly prepare for a cyber-

attack could leave directors exposed to personal liability. This update considers the

changing landscape of directors' duties and outlines some of the issues directors may

need to think about before the gap between criminal culpability and a company's ability

to defend itself becomes insurmountable.

For many companies operating within Guernsey's financial sector, their most valuable assets are held in digital format and the threats to their business are evolving. This year many businesses have seen the re-emergence of previously seen attacks such as ransomware, whilst others are reporting new and innovative attacks. In some cases there have been reports of attackers destroying back-ups, leaving companies with little choice but to consider paying up or lose their data. As long as cybercrime continues to pay, the Guernsey financial sector will continue to be at risk and as the tools at the disposal of cybercriminals grow in sophistication, board members should ensure that they understand and are able to deal with the threats which face their company.

The risks for companies have been well documented. However, the risk for directors who struggle to get the basics right is uncharted territory, and a failure to prepare properly for a cyber-attack and implement recommended guidelines could leave directors exposed to personal liability.

The evolving role and obligations of directors and non-executive directors

In order to consider how and why directors' duties are changing (including their exposure to personal liability) it is useful to briefly revisit a director's core duties. A director's relationship with the company (and indeed any

individual who discharges the function of a director regardless of whether they have the title1) is primarily a fiduciary relationship. Directors owe a duty to act in the best interests of the company, in good faith and honestly and a breach of these duties may result in personal liability on the part of the director. In discharging their duties, directors should always consider whether they are: acting in the best interest of the company and promoting its success; exercising independent judgment; exercising reasonable care, skill and diligence; and avoiding conflicts of interest. Alongside these fundamental duties, directors should also be mindful of their obligations towards the regulator.

Over the next 18 months, the legal framework relating to cybersecurity and data loss is set to change. Whilst the core obligations and duties which a director owes to the company have not changed, the terms of reference are evolving fast. Cybersecurity can no longer be seen as an 'IT issue' and a problem which directors do not need to worry about. Many companies have employed a Chief Information Officer (CIO) to oversee the implementation of appropriate security measures or established a committee to assess the risk and guard against potential threats, but delegation without supervision or control may not be sufficient to prevent a

director from personal liability.

1 In Guernsey, duties owed by 'directors' apply to non-executive directors, alternate directors, and shadow directors. In other words, to any person occupying the position of director by whatever name called. What is important is the substance of the duties carried out by the

individual.



Back to basics

In the aftermath of a cyber-attack, the first port of call for an investigation will be to look at what risk

management regime the directors implemented to protect the company. This may include:

• the type of network security and how often it is tested and monitored

• anti-malware software

• staff training

• security policies including home and mobile working policies and access to removable data, and

• the incident response plan in place.

Most directors will not have the skills or experience to assess the company's security risk but directors will be

expected to recruit appropriate talent, such as a CIO, to manage the cybersecurity risk. Being able to distinguish between the delivery of IT and information security is an important corporate governance step. Simply delegating tasks down the chain without oversight and without understanding where the company's vulnerabilities lie could be construed as failing to act with reasonable care, skill and diligence.

A director has a continuing obligation to acquire and maintain a sufficient knowledge and understanding of the company's business to be able properly to perform the duties of a director. In the context of cybersecurity, this does not require a director to know the underlying policies word-for-word, but they should be aware of the

information risk management system and what strategies have been implemented and why. Directors are advised to review and consider the UK Government's 10 steps to cyber security2 to better understand the threats which their firms might face. Effective management needs to be coupled with good basic controls and directors should test and question the policies. They should ask, where necessary, what third party standards they meet, whether the safeguards are tested to assess vulnerabilities and ensure that the systems and protocols do not fall short of the company's insurance policy requirements. A director may be better placed than

the CIO or its team of information experts to understand which areas of the business are more likely to be exposed to an attack (for example data or intellectual property) and therefore which areas should be prioritised for protection.

Directors need to know how they will react to an attack, who should be informed and what actions to take. Directors should also consider how the board will discuss confidential, legal or litigation advice in board meetings after the event, consideration of which will extend to reports prepared for the board assessing the company's potential exposure, which in the event of litigation may fall within a company's disclosure

obligations.

Other examples may include the need to review standard contracts to see if the parties can rely on a data breach as grounds for early termination and consider whether force majeure clauses should be inserted into standard contacts.

Insurance policies should be routinely monitored to ensure that the company has adequate cover in the event of a cyber-attack. Alongside the company's insurance needs, directors should not forget their own D&O policies and related indemnities. As regulatory investigations become more commonplace, directors would be advised to

check the level and extent of their cover to ensure that they have adequate insurance cover in place.

The above are some examples of how a director's duty to act in the best interest of the company needs to evolve, but directors will not be expected to prepare for every eventuality. It is unlikely that their duties and obligations will be breached by a mere error of judgement. However, if they fail to take reasonable action and recognise that the duties they owe extend to ensuring the company is as prepared as it can be for a cyber-attack (ie, given its size, resources, vulnerabilities etc) then they may be exposing themselves to personal

liability, regulatory sanction and, in an extreme case, criminal liability for breaches under section 515 of the Guernsey Companies Law.

The Guernsey Financial Services Commission (the GFSC)

If the company is a licensed company, then directors will need to be aware of their obligations to the regulator. The GFSC is able to take action if a director fails to discharge their regulatory obligations including issuing public statements, disqualification orders and personal financial penalties. Recent public statements

2 https://www.ncsc.gov.uk/content/files/protected_files/guidance_files/NCSC%2010%20Steps%20To%20Cyber%20Security%20NCSC.pdf


https://www.ncsc.gov.uk/content/files/protected_files/guidance_files/NCSC%2010%20Steps%20To%20Cyber%20Security%20NCSC.pdf


demonstrate the seriousness with which the GFSC takes breaches and the levels of fines that can be imposed on directors. In the event of an inspection, directors should be prepared to demonstrate how they have assessed the risks to the company, and the ways in which this was monitored and controlled. Procedures and

policies will need to be carefully documented, periodically reviewed, and above all directors will be expected to demonstrate that they have effective oversight and control of the measures they have implemented.

Developments in Data Protection Law

Section 61 of the Data Protection (Guernsey) Law 2001 provides that directors may be liable where an offence has been committed with a director's consent, connivance or due to their neglect, and may be punished accordingly. On 25 May 2018, the General Data Protection Regulation (GDPR) (Regulation (EU) 2016/679) will

come into force in the UK. The GDPR will impose severe penalties for non-compliance (up to 20 million euros or four per cent of a company's worldwide turnover). The States of Guernsey have confirmed that the GDPR will be incorporated into local law with the aim to be ready for implementation in May 2018. Compliance with the GDPR and other legislative changes which affect the way in which data is stored and secured will rest with the board. Directors will need to monitor developments and changes to the applicable legislative regimes and ensure that every system meets these requirements. The board will need to adopt a risk based approach to governance.

In addition, a major data breach involving a large number of data subjects could give rise to legal action, whether or not financial loss has been suffered. As the recent English case of Google v Vidal-Hall and others [2015] EWCA Civ 311 demonstrates, it is not just the regulators that companies need to be concerned about. In this case, three individuals brought claims in England against US based Google Inc for misuse of private information and breach of the English Data Protection Act 1998.

Limiting the risk

Each business will have different levels of risk, varying budgets and vulnerabilities, and there is no one-fit solution. Whether a director has acted in breach of the duties owed to the company ultimately depends on the facts of each individual case; however, directors who act reasonably and pro-actively to ensure that their company implements technical and operational measures to prevent and minimise the likelihood of a cyber-attack will have gone a long way to ensuring that they have discharged their duties.

As a minimum, directors may wish to take the following practical steps:

• Employ (or engage) a dedicated cybersecurity expert, a person qualified to brief and train the board of directors regularly.

• Carefully formulate a robust policy on cybersecurity which is constantly monitored and reviewed, forming part of the governance framework, and record all consideration and action taken.

• Ensure the company has adequate insurance and that the board of directors understand the extent and limits of the policy.

• Agree contingency measures for during and after an attack and be prepared to respond to an attack with a

detailed plan which has been tested.

Contacts

Tina Asgarian

Senior Associate, Guernsey

+44 1481 731 447

[email protected]







Tax planning disaster - Guernsey court to the rescue setting aside

transfer to a trust on grounds of mistake

Update prepared by Chris Duncan (Senior Associate, Guernsey) and Iona Mitchell

(Associate, Guernsey) September 2017

The Royal Court has recently saved the owner of the successful Slimming World

business from transferring the proceeds of her life's work into a tax planning structure

which turned out to be fundamentally flawed.

Background

In 2008, upon the advice of professional advisers, the applicant transferred her shares in Slimming World companies into remuneration trusts set up with the purpose of reducing her and her heirs' tax exposure.

However, when the applicant instructed new financial advisers in 2016 she discovered that the previous tax advice had been incorrect and the structure would not procure the tax advantages it had aimed to achieve and

would in fact have disastrous tax implications. In an attempt to remedy this, the Applicant made an application under section 69(1)(a)(iv) of the Trusts (Guernsey) Law, 2007 (the Trusts Law) – which confers wide powers on the Royal Court in Guernsey to make an order in respect of trust property – to have the transfer of the shares into the trusts set aside on the grounds of mistake.

The applicable law

The Royal Court had jurisdiction to determine the matter by virtue of section 4 of the Trusts Law, because the trustee was resident, and the property of the trust was administered, in Guernsey. However, as the companies were incorporated in England, the applicable law to determine the question of whether the transfer should be set aside was that of England and Wales. Expert evidence as to the application of the relevant English law principles of mistake was therefore adduced in support of the application.

The test and tax avoidance

There is a well-developed body of case law relating to the question of whether a transfer into a trust should be set aside on the grounds of mistake. The leading authority in England is the decision of the English Supreme Court in Pitt v Holt [2013] UKSC 26, which has recently been followed in Guernsey (in both Nourse v Heritage Corporate Trustees Limited and Concept Fiduciaries Limited (Royal Court Judgment 01/2015) and Gresh v RBC Trust Company (Guernsey) Limited & Anr (Royal Court Judgment 06/2016)).

The decision of Pitt v Holt identified the following principles when considering whether to set aside a transfer on the grounds of mistake:

• there must be a distinct mistake, as distinguished from mere ignorance or inadvertence;

• a mistake may still be a relevant mistake even if it was due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he or she deliberately ran the risk, or must be taken to have run the risk, of being wrong;



• the mistake must be causative and sufficiently grave, and the court must find that it would be unjust or unconscionable to leave the mistake uncorrected; and

• the injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be

evaluated objectively but with an intense focus on the facts of the particular case.

The present case is interesting because it deals with the topical and controversial question of whether the court should grant relief where the mistake took place in the context of tax avoidance, which was described in passing by Lord Walker in the Pitt v Holt decision as 'a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures'.

Since the English Supreme Court made those comments in Pitt v Holt, the courts of both Guernsey and Jersey have considered this question and, although each case will depend on its facts, the message seems to be that

tax avoidance (as opposed to tax evasion, which is unlawful) is not of itself a reason to refuse to set aside a transfer on the grounds of mistake. Determining what amounts to a 'social evil' is a complex question, and not one which the Courts should necessarily seek to answer in this context, especially where members of society must be entitled to organise their affairs in such a way so to reduce tax exposure as much as possible within the confines of what is lawful.

The decision

In the present case, the Royal Court distinguished 'artificial tax avoidance transactions', which may justify refusal to grant the relief, and the present arrangement. The Lieutenant Bailiff noted that here there was a genuine transfer of the shares into the trusts, with a genuine trustee, following a remuneration trust structure which has been adopted by many businesses similar to Slimming World. The transfer had been made on the basis of incorrect professional advice, would not have been carried out had the applicant known the true position, and if uncorrected would have meant that the applicant had divested herself of her controlling

shareholding in her companies for non-existent tax advantages. Accordingly, the relief was granted and the transfer was set aside. This was not prevented by the passage of some eight years between the creation of the scheme and the discovery of the error.

Given the test set out in Pitt v Holt was followed in the recent Gresh decision, it is expected that the same result would have been reached had the Royal Court been applying Guernsey law.

The authors would of course be happy to discuss the judgment (which can be found here) in further detail and can be contacted using the details provided.

Contacts

Chris Duncan


+44 1481 739 373

[email protected]

Iona Mitchell

Associate, Guernsey

+44 1481 731 406

[email protected]





http://www.guernseylegalresources.gg/CHttpHandler.ashx?id=106673&p=0


The use of notification injunctions as an asset preservation tool in Guernsey

Update prepared by Tina Asgarian (Senior Associate, Guernsey) September 2017

In Holyoake and another v Candy and others [2017] EWCA Civ 92, the English Court of

Appeal confirmed that the English courts had jurisdiction to grant freestanding

notification orders. This update considers whether a similar jurisdiction exists in

Guernsey and the utility of notification injunctions as an asset preservation tool

compared to the more conventional freezing injunction.

The difference between a notification injunction and a conventional freezing injunction

A notification injunction requires the respondent (to the injunction) to give notice to the applicant of the fact that it will be disposing of or dealing with its assets. Traditionally notification injunctions have been used in conjunction with a 'conventional' freezing order1 for the purpose of restraining a respondent from disposing or dealing with assets without first giving the applicant advance warning.2 However, the decision in Holyoake,

confirms the English court's jurisdiction to grant 'freestanding' notification injunctions.

The main difference between a freestanding notification injunction and a conventional freezing injunction is that a notification injunction does not provide a blanket ban on a respondent dealing with its assets. However, notification injunctions should not be viewed as a distinct type of injunction, more a modified form of a freezing injunction, which gives the applicant an opportunity to apply for an order preventing the defendant from

disposing of its assets.

Are notification injunctions available in Guernsey?

In England, the court's jurisdiction to grant an injunction is set out in section 37(1) of the Senior Courts Act 1983 (SCA), which provides that:

'The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.'

In Holyoake, it was held that this jurisdiction extends to the court granting an order requiring a respondent to give notice of any disposals of or dealing with assets, ie, a notification injunction.

In Guernsey, the court's jurisdiction to grant an injunction is set out in section 1 of the Law Reform (Miscellaneous Provisions) (Guernsey) Law 1987 (the 1987 Law).

'If proceedings have been or are to be instituted before the Court, the Court may by order, at any time before it makes a final judgment in the proceedings or before the proceedings are otherwise concluded, on the application of any person who is, or as the case may be will be, a party to the proceedings (such person being referred to in this Part of this Law as "the applicant"), grant an injunction addressed to another person (such

other person being referred to in this Part of this Law as "the respondent") requiring the respondent to do or not to do anything.'

1 See paragraph 17 of the Court of Appeal Judgment in Holyoake in which a conventional freezing order is described as 'an injunction

prohibiting a party from disposing, dealing with or diminishing the value of certain assets'. 2 See for example Lakatamia Shipping Co Ltd v Su [2014] EWCA 636.



Accordingly, unlike the SCA the 1987 Law confers an express jurisdiction on the Guernsey court to grant an injunction requiring the respondent to do or not to do something. Such an order does not need to be ancillary to a freezing injunction, and unlike the Holyoake case there is no need to tread down the path of the application

of logic to show that by extension the Guernsey court has jurisdiction to grant a notification injunction under the 1987 Law. But even if there were any doubts as to the unfettered jurisdiction of the Guernsey court to grant freestanding notification injunctions, given that the provisions of section 1 of the 1987 Law are sufficient to grant a conventional freezing order, then it would be a logical extension of that jurisdiction to grant a notification injunction for which the function, operation and machinery are… essentially equivalent to those of a conventional freezing order.3

The applicable test

Under Guernsey law the test for a conventional freezing injunction is:4

• a good arguable case;

• a real risk of dissipation; and

• it is just and convenient to grant the relief sought.

In Holyoake the English Court of Appeal confirmed that the same threshold test applied to notification injunctions. At first instance it had been suggested that a notification injunction was 'less intrusive' than a

conventional freezing injunction, and as such a lower standard of evidence of risk of dissipation was required. However, the English Court of Appeal was quick to quash the notion that an applicant who was struggling to meet the evidential burden for a freezing injunction could seek a notification injunction instead. The court's reasoning, which is set out at paragraph 36 of it is judgment, can be summarised as follows:

1. Both types of injunctions are concerned with protecting an applicant against the risk that the respondent will dissipate its assets so as to defeat the enforcement of a possible future judgment. Both injunctions

prevent respondents from dealing or disposing with their assets (subject to certain exceptions) and both injunctions are supported by the threat of contempt proceedings for breach.

2. Both forms of injunction involve a draconian interference with the rights of the respondent to deal with their assets, and both carry a reputational stigma.

3. Both affect third parties who knowingly assist the affected applicant breach the order or wish to deal with the assets.

4. The only significant difference between a freezing injunction and a notification injunction is the scope of the

exceptions to the prohibition in relation to notified transactions.

The court did identify one exception to the above, and that was in respect of a 'simple order requiring notice to be given of a proposed disposition of a specific property'.5 In such a case, the Court of Appeal observed that the test might differ (because the notification being given is not blanket but specific to an identifiable asset), leaving the door open to arguments that in such cases the evidential requirements may be less stringent; however, it seems unlikely that if the evidential burden is lower, an applicant would receive the full protection of the modified freezing injunction.

The Guernsey practice in relation to freezing injunctions has to a large extent followed the practice which has developed in England and Wales;6 as such it stands to reason that if the Guernsey courts were prepared to grant a notification injunction, the same threshold test would apply in Guernsey as it does in England. This would ensure that the same safeguards which are afforded to respondents on the making of a freezing order are extended to respondents prohibited from dealing with their assets by reason of a notification injunction.

Notification orders versus freezing injunctions

Given that the same threshold test applies in the case of either injunction, the temptation for some applicants may be to discard the usefulness of a notification injunction in favour of a freezing injunction. After all if you've

met the test for a freezing injunction, why not inconvenience your opponent with the more onerous order of the two?

3 See paragraph 36 of the Court of Appeal's judgment in Holyoake. 4 As confirmed by the Court of Appeal in Seed International v Tracey [2003-04] GLR 98 at para 18. 5 See paragraph 35 of the Court of Appeal's judgment in Holyoake. 6 See generally Garnet Investments Ltd v BNP Paribas (Suisse) SA and others 2007-08 GLR 442.



In some cases the decision may be taken out of the applicant's control. As stated above, one of the factors a court will consider before it grants an injunction is whether it is satisfied that it is just and convenient to grant the relief sought. With the advent of the freestanding notification injunction, it is possible that a court may

decide that the level of intrusiveness of a conventional freezing order is inappropriate and not just in the circumstances, but recognising the risk that an applicant's judgment may otherwise go unsatisfied, it would be open to a court to modify the nature of the relief sought and grant a notification injunction instead.

Judicial intervention aside, to view a notification injunction as the lesser of the two remedies available to an applicant overlooks the potential of a notification injunction as an asset preservation tool. Had the injunction not been set in the case of Holyoake, the injunction as granted was in many respects more onerous than a conventional freezing injunction. For example it did not contain an exception for transactions in the ordinary

course of business, and it did not employ a value cap as you would typically see in a conventional freezing order, which meant that regardless of maximum conceivable value of the applicant's claims in the underlying proceedings, the notification injunction affected the respondent's total global assets (without the applicant having to first satisfy the court that it was just to make an extra-territorial order).

It remains to be seen whether a future applicant in Guernsey could obtain a notification injunction on the same

terms as were granted at first instance in Holyoake, but that does not diminish the value of these injunctions and the benefits of these should not be underestimated: (a) notification injunctions give applicants the best

vantage point from which to observe how a respondent deals with its assets (potentially) over a prolonged period of time; (b) this in turn means that it will be easier for an applicant to decide when best to apply for a conventional freezing order or post-judgment freezing order to protect its judgment; (c) because the respondent must put the applicant on notice of the potential sale of its assets, the applicant may decide to apply to the court to vary the order to prevent that specific transaction from taking place (ie, to preserve a specific pool of assets for enforcement purposes); and (d) notification injunctions come with penal notices and

extend to third parties on notice. Respondents who fail to treat these orders as seriously as they would a freezing order do so at their own peril.

In the right circumstances, notification injunctions can be a powerful asset preservation tool and we keenly await the first reported judgment of such an injunction being granted in Guernsey.

Contacts

Tina Asgarian


+44 1481 731 447

[email protected]







The Paternalistic Trustee - when is it appropriate to keep a young adult

beneficiary in the dark?

Update prepared by Bethan Watts (Associate, Jersey) August 2017

In the recently-published judgment of In the Matter of the C Settlement [2017] JRC

035A, the Jersey Royal Court considered whether a 19-year-old beneficiary could be

'kept in the dark' as to the size of his family's £75 million trust fund, on the basis that

he was too young to know.

Although the legal age of capacity is 18, in this recent judgment the court took the view that a beneficiary who has legal capacity may not in fact have sufficient maturity to be burdened with matters of trust administration. The court found that the young adult beneficiary should be kept in the dark as to the size of his beneficial entitlement, in order that he should be encouraged to continue his higher education and to obtain employment.

The Trustee's Application

The judgment concerns a Beddoe application made by the trustee. A Beddoe application is made under Article

51 of the Trust (Jersey) Law 1984 where a trustee seeks the court's approval to initiate, defend or continue litigation proceedings which concern the trust.

In the current case, a claim for approximately £2 million had been brought against a company wholly owned by the trust. The trustee proposed that the claim should be settled by a payment of £350,000 from the trust to the Plaintiff in full and final settlement.

As is common with Beddoe applications, the trustee made submissions relating to (i) the likely costs which

would be incurred if the proceedings continued to trial, and (ii) the merits of the claim and the likelihood of success. The trustee anticipated that it would incur approximately £1 million in costs, and the likelihood that the claim would succeed was around 30%. The trustee asked that the court should bless the proposed settlement.

The Role of the Beneficiaries

It is usual practice that the adult beneficiaries should be convened to a Beddoe hearing. In the present case, the trustee convened two of the three principal beneficiaries, but did not convene the third, "K", who was 19

years old.

The trustee, together with K's mother (who was herself a beneficiary) had decided that K should, for his own benefit, not learn the value of the trust fund until he was at least 21 years old. This was on the basis that it would be a 'harmful and damaging burden' for K to understand the size of the trust at his age. He could

therefore not be convened to the Beddoe application and could not be involved in any other matters of trust administration.

The Court's Predicament

The law confers capacity on individuals when they attain the age of 18.

The court needed to satisfy itself that the trustee was correct in deciding not to involve K in the proceedings. In normal circumstances, K should be entitled to express a view as to whether or not the claim should be settled.



K might have had a greater appetite for litigation, such that he opposed the proposed settlement of the claim. By not convening him, the trustee and the court would be denying him the opportunity to have his voice heard.

In reaching its decision, the court noted its obligations under the Human Rights (Jersey) Law 2000. The court

reached the conclusion that the rights were not strictly engaged, but even if they were, the trustee's actions were justified on grounds of proportionality and overall fairness.

The Court's Conclusion

The court in this case expressed a strong concern that a beneficiary learning of a significant entitlement at a young age could have catastrophic effects. The young beneficiary may lose enthusiasm for school or university, and may never develop any inclination to seek employment. Instead, he or she may decide on a "life of party-

going and riotous living" and might become reliant upon alcohol or toxic substances.

The court decided that in this case the trustee's paternalistic approach was justified. With good reason, discretionary trusts will commonly confer benefit on an individual beneficiary at the age of 21, 25 or even 30, in spite of the fact that the age of capacity is 18.

Accordingly, the court granted Beddoe relief and approved the proposed settlement, and upheld the trustee's

decision not to convene K.

Comment

The situation of K in this case is not novel. Many parents, guardians, and trustees will frequently find themselves similarly concerned not to 'spoil' a young beneficiary and risk pushing them towards poor life decisions.

It is not clear from the judgment in this case how deeply the court delved into the particular circumstance or character of K. The judgment does state that the justification of a paternalistic approach will depend on the facts of the particular case but the judgment (unsurprisingly perhaps) says very little about K.

Whether the court might adopt a similarly paternalistic approach in future cases will, therefore, vary from case to case. If it can be established that it is genuinely in the best interest of those beneficiaries that they be kept in the dark then no doubt the court will be willing to take a similar approach. However, the mere fact of a substantial trust fund and a young adult beneficiary will not necessarily be sufficient to warrant that beneficiary's exclusion from expressing his or her views on relevant matters. It may well depend on the particular maturity and character of the individual concerned. Trustees who wish to take such an approach must

be prepared to justify their position in some detail.

Contacts

Bruce Lincoln

Partner, Jersey

+44 1534 676 227

[email protected]

Bethan Watts

Associate, Jersey

+44 1534 676 917

[email protected]








Crociani and others v Crociani and others

Update prepared by Ben Thorp (Associate, Jersey) September 2017

The recently-published judgment in Crociani and others v Crociani and others [2017]

JRC 146 marks the end (subject to appeal) of the beneficiary plaintiffs' long-running

claim against the trustee defendants. The claim, first issued in 2012, endured bitter

interlocutory skirmishes (the judgments in relation to many of which have periodically

been published during the course of the last five years) and an appearance before the

Privy Council, but has now been resolved categorically in favour of the plaintiffs.

Introduction The case is, at its heart, a breach of trust claim (or rather, a series of breach of trust claims) brought by Cristiana Crociani (Cristiana) and her minor daughters against the trustees and former trustees of two related

structures; the Grand Trust and the Fortunate Trust. The law applied by the court in deciding the claim does not break new ground or traverse issues that are particularly novel or unusual in the context of offshore trust disputes. Ultimately, the court decided that the breaches claimed by Cristiana were clear, and Commissioner Clyde-Smith, who presided over the 12-week trial, was critical of some of the conduct of the trustees of the Grand Trust, particularly its more recent Mauritian

trustees, in finding for the plaintiffs.

The facts of the case and the characters involved make the case an interesting read, and the judgment provides useful illustration of how the court might approach remedying breaches of trust by trustees. The case

The case arises out of a bitter family dispute principally between a plaintiff beneficiary daughter (Cristiana) and her defendant trustee mother (Edoarda Crociani (Edoarda)) in relation to family wealth emanating from Cristiana's father and Edoarda's husband, Camillo Crociani (Camillo). Camillo was a wealthy and prominent Italian industrialist who died in Mexico in 1980 after fleeing his native Italy in order to avoid imprisonment for his role in the Lockheed scandal. Camillo's considerable interest in a successful and prosperous Italian engineering company allowed the family to enjoy a lavish and privileged lifestyle.

Ownership and control of the Italian engineering company was ultimately acquired by Edoarda after Camillo's passing (following deals done by Edoarda with Camillo's children from a previous marriage). That interest has generated very significant wealth for the family. In 1987, by which time she and her two daughters were living

in New York, Edoarda settled the Grand Trust, principally from the wealth she had inherited from Camillo. The Grand Trust lies at the heart of the recently-concluded Jersey proceedings. The Grand Trust was settled as a Bahamian law trust and further to advice from Edoarda's US advisors, Finley,

Kumble, Wagner, Underberg, Manley, Myerson & Casey (which famously (and coincidentally) suffered a precipitous decline and ultimately liquidation shortly after its involvement with the Grand Trust). On its face, the Grand Trust records Edoarda's intention to devolve some of the family's wealth by creating separate funds for each of her daughters, Cristiana and Camilla (who were both minors at the time). Together with Edoarda's



daughters, Camillo Crociani Foundation Limited (the Foundation) was also named as a beneficiary of the Grand Trust.

The Grand Trust initially comprised the benefit of a promissory note issued by a Dutch holding company, Croci International BV, to Edoarda, and assigned by Edoarda to the Grand Trust. The promissory note was issued in the sum of ITL75billion, bearing interest at eight per cent per annum, and was payable in December 2017. In the years following its establishment, further assets were settled on the Grand Trust (notably including a very valuable collection of artwork), and a substantial portfolio of cash and investments was accumulated from payments of interest made by Croci International BV under the promissory note. The trustees of the trust also

changed a number of times. By 2009, Edoarda, Paul Foortse (Mr Foortse, one of Edoarda's close advisors) and BNP Paribas Jersey Trust Corporation Limited (BNP) held office as trustees of the Grand Trust. Separate to the Grand Trust, Edoarda also settled a further trust called the Fortunate Trust in the late 1980s, which was initially established to hold a valuable collection of art (separate from the artwork subsequently settled on the Grand Trust). Edoarda retained close control over the Fortunate Trust via, amongst other things,

direction over its management and investment, powers to direct distributions of income to herself, and powers

of revocation and amendment. The terms of the Fortunate Trust were amended in December 2009 with the effect that Edoarda tightened her control of the direction of the trust, became the sole discretionary beneficiary of income, and retained the right to withdraw any or all of the property from the trust fund and to revoke or amend the trust deed. At the centre of the Jersey proceedings is the decision taken in 2010 by the then trustees of the Grand Trust to

appoint out all of the assets of the Grand Trust, except the promissory note, to the (by then amended) Fortunate Trust (referred to in the judgment as the '2010 appointment'). That appointment was made under clause Eleventh of the Grand Trust deed, which gave the trustees an overriding power to appoint the trust fund to other trusts 'in favour or for the benefit of all or any one or more exclusively of the others or other of the beneficiaries (other than the Settlor)'. The validity of the 2010 appointment was a central issue for the Jersey court in considering the case. The

plaintiffs claimed that the appointment removed assets from the Grand Trust (from which, they claimed, Edoarda was not able to benefit) to the Fortunate Trust (of which Edoarda was a direct beneficiary and over which she exercised significant control) contrary to the terms of the Grand Trust, and therefore in breach of that trust.

The defendants maintained that Edoarda always intended, and was always intended, to be able to benefit from the Grand Trust. They argued that the vehicle for her benefit was the Foundation, her indirect interest in which

allowed her to benefit from the Grand Trust. The Foundation had, however, been set up before the Grand Trust was settled as a not-for-profit company with charitable purposes (namely, to receive distributions from trusts and to donate those distributions to charities in the Bahamas and, later, anywhere in the world). Tellingly, the Foundation never received any such distributions, either for the benefit of charity, Edoarda or anyone else. While the court conceded that it was technically possible for Edoarda to receive benefit from the Grand Trust via

the Foundation, ultimately it found that the Grand Trust was not created with the purpose or intention of providing any benefit, directly or indirectly, to Edoarda (other than as a default beneficiary), and that the Foundation was not included as a beneficiary of the Grand Trust for the purposes of allowing Edoarda to benefit (but rather as the make-weight in an arrangement designed for US tax efficiency). In the course of defending her daughter's claim, Edoarda had, in anticipation of the difficulties posed by arguing that the Foundation was intended to be a vehicle for her benefit, amended her case to argue in the alternative

that if the court found, as it ultimately did, that she was not able to benefit from the Grand Trust, then the

settlement of the trust was based on a mistake (since she had always intended to have been able to benefit) and should be set aside. This was a notable amendment to Edoarda's case. The first two years of the proceedings had essentially been taken up by a forum challenge led by Edoarda, which she had pursued all the way to the Privy Council. That challenge relied on the terms of the Grand Trust being valid, so her subsequent amendment (made only once

that forum challenge had been exhausted) was seemingly contradictory.



In an extraordinary turn of events, however, on the eve of trial Edoarda wrote to the court to indicate that due to poor health she would not be attending and would not be legally represented. Edoarda's explanation for this eleventh-hour withdrawal was dismissed by the court, which concluded that she (and Camilla, a defendant in

her own right, who had written in similar terms and whose position had been aligned with her mother's throughout the proceedings) had deliberately stayed away. As a consequence, Edoarda's mistake claim was not prosecuted and was accordingly discounted by the court. Having concluded that the Grand Trust was not created with the intention to provide benefit to Edoarda, the court went on to consider the construction of the power used by the trustees of the Grand Trust to make the 2010 appointment. Accepting expert evidence on the negative US tax implications for Edoarda (and the Grand

Trust's status as a non-grantor trust) of allowing any distribution from the Grand Trust to a trust in favour or for the benefit of Edoarda, the court concluded that clause Eleventh of the Grand Trust prohibited any transfer to a trust of which Edoarda was a beneficiary. The court having reached the decision it did in relation to both the intentions behind the Grand Trust and the effect of clause Eleventh, it is unsurprising that the court went on to also conclude that the 2010 appointment

was void and of no legal effect. In reaching this conclusion, the court found for the plaintiffs on all three of the

grounds by which they had sought to impugn the 2010 appointment; namely that it was (1) an excessive execution and outside the scope of the trustees' powers; (2) a fraud on the power; and (3) a mistake under Article 47(H) of the Trusts (Jersey) Law 1984. The ultimately void 2010 appointment was a long time in the making. As early as 2001, discussions had been held as to how the Grand Trust might be restructured to better reflect how Edoarda had intended the trust to

operate. At that time, BNP sought advice from Mourant du Feu & Jeune (a predecessor firm of Mourant Ozannes) as to the possibility of re-settling both the Grand Trust and the Fortunate Trust into two new trusts. Mourant du Feu & Jeune's advice pointed out the difficulties posed by the distribution restrictions imposed by clause Eleventh of the Grand Trust, however, and queried how the proposed re-settlement of the Grand Trust could be construed as being in the interests of its beneficiaries. The court noted that had that advice been followed, the later litigation would not have taken place.

Ultimately, however, the 2010 appointment did take place, and substantial assets of the Grand Trust were transferred to the Fortunate Trust. The appointment documentation was prepared by Ogier for the Grand Trust trustees, though the court concluded that their instructions excluded enquiry as to the efficacy of clause Eleventh to accommodate the transfer (on which basis the court also subsequently refused to exonerate BNP

for reason of having sought legal advice). The 2010 appointment marked the start of the precipitous breakdown in the relationship between Cristiana and

Edoarda, which ultimately culminated in the issue of the Jersey proceedings. The court's judgment provides some interesting commentary on the dynamic of a mother-daughter relationship that the court clearly felt was dominated and controlled by Edoarda. The 2010 appointment itself and the various steps taken by or on behalf of Edoarda seem indicative of her desire to control both the family's assets and her daughters. Indeed, the court considered Cristiana to be a 'woman of some considerable courage' in pursuing her (and her daughters') interests in the family wealth, despite the obstructions put in her way at every opportunity by her mother.

Some of those obstructions, which formed part of the plaintiffs' claim and were therefore ruled on by the court, included the following:- The revocation in 2011 by Edoarda of the Fortunate Trust, which resulted in those assets transferred out of

the Grand Trust by the 2010 appointment falling directly and solely into the hands of Edoarda.

The decision in 2012 to appoint Appleby Trust (Mauritius) Limited (Appleby Mauritius) as sole trustee of

the Grand Trust and to change the proper law of the trust to Mauritian law. The court found that that move was tactical on Edoarda's part, designed to place impediments in Cristiana's way in respect of her by then articulated claims in relation to the Grand Trust. The court concluded that in making the appointment and changing the proper law, Edoarda had been acting for an ulterior purpose, and all three of the appointing trustees were not acting in the interests of the beneficiaries as a whole. The 2012 appointment was therefore set aside by the court as being void and of no effect.



Further to receipt of Cristiana's letter before action in the Jersey proceedings, the steps taken in relation to the so-called 'Agate appointment', by which Appleby Mauritius and the former trustees sought to insulate the 2010 appointment from challenge by Cristiana by appointing, as an asset in itself, the right of the

Grand Trust to recover the assets transferred by the 2010 appointment. The Agate appointment appointed those rights first to the Agate Trust (of which Camilla and the Foundation were beneficiaries), but, when the Agate Trust lapsed 7 days' later, ultimately to the Foundation (of which Edoarda was by then the sole beneficial owner). The court also set that appointment aside as being void and of no effect.

The decision in 2016 by Appleby Mauritius to appoint GFin Corporate Services Limited (GFin) as sole trustee of the Grand Trust. The court reserved particular criticism for Appleby Mauritius in its handling of

the 2016 appointment of GFin (another Mauritian corporate trustee), and the events leading up to it. The appointment followed quickly on the heels of Appleby Mauritius' decision to agree to an extension of the promissory note from December 2017 to 2022 (which the court found was itself a breach of trust). Once that extension had been agreed (and the court found that 'agreement' to have been manufactured), GFin was immediately appointed (over the course, it seems, of just a few days). GFin misguidedly then opened again the issue of forum and issued proceedings in Mauritius seeking to restrain the Jersey proceedings

(which by then had been on foot for four years). Since its appointment in 2012 had been invalid, Appleby

Mauritius was a trustee de son tort of the Grand Trust and the court found that it had acted in breach of trust in (1) agreeing to the amendment of the promissory note; (2) appointing GFin as trustee; (3) assigning the promissory note to GFin; and (4) purporting to amend the provisions of the Grand Trust so as to give GFin a platform to commence rival proceedings in Mauritius.

Orders

All the participating defendants (BNP, Mr Foortse and Appleby Mauritius) sought exoneration from liability in the event that breaches of trust were found. In the event, the court agreed to exonerate only Mr Foortse, who it found had effectively served as a lay trustee for no reward. Having found against and refused to exonerate most of the defendants, the court made orders including the following:-

The 2010 appointment, the 2012 appointment of Appleby Mauritius, the Agate appointment and the 2016

appointment of GFin would be set aside as void and of no legal effect.

Edoarda, BNP and Mr Foortse would be removed as trustees of the Grand Trust and a new trustee appointed in their place.

Edoarda and BNP must within 28 days of appointment of the new trustee jointly and severally pay to the new trustee a sum of just over USD100m to reconstitute the Grand Trust.

BNP was to be indemnified by Edoarda pursuant to both contractual indemnities agreed between them, and the inherent jurisdiction of the court.

Appleby Mauritius was liable for the breaches of trust arising from the 2016 appointment of GFin and the transfer of the promissory note, the compensation for such breaches to be assessed.

An interesting consequence of the court's decision to order the reconstitution of the Grand Trust was the prospect that Camilla might stand to benefit from that reconstitution (as a named beneficiary of the Grand Trust) notwithstanding her acquiescence to the 2010 appointment, her complicity in much of what Edoarda did to frustrate Cristiana's claims, and the significant benefit she ultimately acquired as a direct result of the

various breaches of trust.

The court acknowledged its sympathy for the defendants' submission that in view of the circumstances, Camilla's fund should simply be treated as having been distributed to Camilla, with the effect that only Cristiana's fund need be reconstituted. The court was, however, mindful of the fact that Camilla was not the only beneficiary of her fund (her daughters, and Cristiana and her daughters (as default beneficiaries) also potentially stood to benefit). Rather than deny the other beneficiaries their potential benefit in Camilla's fund,

the court indicated its intention to direct that Camilla's fund also be reconstituted, but that Camilla (and



possibly her daughters) be precluded from benefit until such time as Edoarda made full restitution of the assets received by her, via the revoked Fortunate Trust, from the Grand Trust.

Comment The court's judgment and the orders that followed represent a finding overwhelmingly in the plaintiffs' favour (whose task was undoubtedly made easier by the unexpected and last minute non-appearance of the principal defendant). In several respects, this case is one of extremes; the value of the trust and the opulent lifestyle of the family concerned, the deterioration of the relationships within that family (which, at one stage, involved accusations of harassment and attempted kidnapping), the duration of the proceedings and the hostile and

attritional manner in which they were fought, the decisions taken, particularly by Edoarda and the overseas institutional trustees, are all exceptional by any normal standards. While the law applied by the court in deciding the case broke no new ground, the case is an interesting (if lengthy) read from a human interest perspective, and serves as a useful reminder to trustees of the risks involved in losing sight of the impartiality of office, and the need to prioritise the interests of beneficiaries

above almost all else. Though such principles will be well known to all trustees, the consequences for the

trustees in the Crociani case of not following those principles should be a sobering reminder of what can go wrong.

Contacts

Bruce Lincoln

Partner, Jersey

+44 1534 676 461

[email protected]

Ben Thorp

Associate, Jersey

+44 1534 676 096

[email protected]







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