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Industry Updates

Hanging by a Thread: the Re-modelling of Modified Universalism

02 Dec 2014

On 10 November 2014, the Privy Council handed down its decision in Singularis Holdings Limited v PricewaterhouseCoopers 1, together with its decision in a related case, PricewaterhouseCoopers v Saad Investments Company Limited 2, both on appeal from the Court of Appeal in Bermuda.  The decision provides guidance on the application of the principle of modified universalism.  

By way of background, Grant Thornton had been appointed as official liquidators to Singularis Holdings Limited ("Singularis") and Saad Investments Company Limited ("SICL" and together with Singularis, the "Companies") in the Cayman Islands, the Companies' jurisdiction of incorporation.  The liquidators obtained orders in the Cayman Islands pursuant to section 103(3) of the Companies Law (2013 Revision) against PricewaterhouseCoopers ("PwC"), the Companies' auditors registered in Bermuda, requiring PwC to deliver to the liquidators any "property or documents belonging to the Companies" in order to assist the liquidators in tracing assets.  PwC took the position, which was not contested by the liquidators, that as a matter of Cayman Islands law, the requirement to produce documents pursuant to orders made under section 103(3) of the Companies Law, was not sufficiently broad to include PwC's internal working papers because those documents would not be considered as "belonging to" the Companies.  This is the generally accepted interpretation of section 103(3) of the Companies Law, albeit this interpretation of the section has never been tested.  

The liquidators subsequently obtained recognition of their appointment to Singularis from the Bermudan Court and an order winding up SICL in Bermuda.  The liquidators then sought the production of PwC's internal working papers in reliance upon (i) section 195 of the Bermudan Companies Act 1981, which applied to SICL as a company being wound up in Bermuda, and (ii) the common law principles of modified universalism applicable in insolvency proceedings, in respect of Singularis.  In both cases, the liquidators considered that the orders which could be made by the Bermudan Court requiring PwC to produce documents and information would be wide enough to include PwC's internal working papers and would not be limited to documentation or information belonging to the Companies.  This is because section 195 of the Bermudan Companies Act 1981 is in broader terms than section 103(3) of the Cayman Islands Companies Law.  

At first instance and on appeal, the liquidators obtained the relevant orders against SICL, but ultimately the Privy Council found that there was no jurisdiction to wind up SICL in Bermuda, that the liquidation should be stayed and that consequently the orders requiring the production of information and documents (which were based on the premise that SICL was being wound up in Bermuda) could not stand.  

In respect of Singularis, no winding up order was ever sought in Bermuda and the application for the production of information and documents was based on common law principles only.  At first instance, the Supreme Court in Bermuda made the orders sought against PwC on the basis that there was a common law power to do so "by analogy with the statutory powers contained in section 195 of the Companies Act".  The Bermudan Court of Appeal disagreed and reversed the decision.  The Privy Council was therefore asked to consider the following questions on the Singularis appeal:

(a)  Did the Bermudan Court have a common law power to assist a foreign liquidation by ordering the production of information in circumstances where (i) the court had no jurisdiction to wind up Singularis and (ii) its statutory power to order the production of information was limited to cases where the foreign company was being wound up in Bermuda? 

(b)  If such a power exists, can it be exercised in circumstances where an equivalent order could not have been made by the foreign court where the liquidation was proceeding? 

In considering these questions, the Privy Council was obliged to address the apparent conflict between Cambridge Gas v Committee of Navigator Holdings 3 and Rubin v Eurofinance 4 and to give guidance as to whether the principle of modified universalism as articulated by Lord Hoffman in Cambridge Gas was correct.  By a three to two majority, the Privy Council found that in principle there was a common law power to assist a foreign court by ordering the production of documentation and information to facilitate the collection of assets in a liquidation.  However, the Privy Council found that this power was not exercisable in circumstances the liquidators could not have obtained similar relief in their home jurisdiction. 

The following points can also be taken from the majority Privy Council decision: 

(a)  The general principle of modified universalism identified in Cambridge Gas has been upheld in theory and nothing in Rubin purported to say otherwise. 

(b)  However, the principle is much more limited in scope than articulated in Cambridge Gas.  In particular, the "golden thread" of modified universalism in insolvency proceedings does not mean that the domestic court has a common law power to assist the foreign court by doing whatever it could have done in a domestic insolvency.  This is because the principle of modified universalism is subject to local law and local public policy and the domestic court can only ever act within the limits of its own statutory and common law powers.  To this extent Cambridge Gas is overruled; the first instance decision in the Cayman Islands case of Irving H Picard and Bernard L Madoff Investment Securities LLC v Primeo Fund 5 is wrong and the earlier Privy Council decision (on appeal from the Cayman Islands) Al Sabah v Grupo Torras SA 6 is approved. 

(c)  In this regard, just because there would be a statutory power to make a particular order in a domestic insolvency, does not mean that a similar power automatically exists at common law so as to be available to a foreign office holder seeking assistance.  However, equally, the existence of a statutory power does not necessarily exclude the common law.  It will only do so where the "…statutory scheme can be said to occupy the field.  This will normally be the case if the subsistence of the common law power would undermine the operation of the statutory one, usually by circumventing limitations or exceptions to the statutory power which are an integral part of the underlying legislative policy."  The Grand Court reached a similar conclusion in Primeo

(d)  In the absence of a statutory power available to a foreign office holder, the question therefore becomes how far the common law should be developed to make the relevant power sought by the foreign office holder available to assist the foreign court.  The Privy Council considered that this does not admit to a single universal answer and depends on the nature of the power that the court is being asked to exercise.  The Privy Council therefore limited their consideration to the assistance sought in this case, namely the production of information and documentation.  

(e)  Given that Singularis was not being wound up by the Bermudan Court, section 195 of the Bermudan Companies Act 1981 did not apply and there was therefore no statutory power available to assist the Cayman liquidators under Bermudan law.  However, the majority of the Privy Council considered that there was a common law power to compel the production of information in oral or documentary form that was necessary (i) for the administration of a foreign winding up and/or (ii) to identify and locate the assets of the company.  

(f)  This power was subject to the following limitations: 

(i)  It is only available to assist foreign court appointed officers or equivalent public officers in an insolvency.  It is not available on a voluntary winding up, which is essentially a private arrangement that is not conducted by a court officer.  

(ii)  The power exists for the purpose of enabling the foreign court to surmount the problems posed in a worldwide winding up of the company's affairs by the territorial limits of the foreign court's powers.  Therefore the power does not allow foreign liquidators to do something that they could not do under the law pursuant to which they were appointed.  

(iii)  It is only available where necessary for the performance of the foreign office holder's functions. 

(iv)  The order must be consistent with the substantive law and public policy of the assisting court.  It follows that the power is not available for purposes which are properly the subject of other schemes for the compulsory provision of information, e.g. obtaining information for the purpose of actual or anticipated litigation. 

(v)  The exercise of the power is conditional upon the liquidators paying the third party's reasonable costs of compliance. 

As a result, the appeal was dismissed because the liquidators would not have had the power to require PwC to produce this documentation under Cayman Islands law. 

The Privy Council were not asked to consider whether auditors' working papers did or did not constitute the property of Singularis.  The liquidators had accepted that they did not.  However, interestingly, two members of the Privy Council stated that they wanted to express their doubt as to whether information which PwC acquired solely in their capacity as Singularis' auditors could be regarded as belonging exclusively to them simply because the documents in which they recorded that information were working papers and as such PwC's property.  It remains to be seen whether liquidators will seek to rely on these obiter statements in future applications pursuant to section 103(3) of the Companies Law to endeavour to obtain internal working papers from auditors.  

1 [2014] UKPC 36.

2 [2014] UKPC 35.

3 [2007] 1 AC 508.

4 [2012] UKSC 46.

5 [2013] 1 CILR 164. See our update of 27 March 2013 entitled Jurisdiction and Applicable Law in Cayman Cross Border Insolvency Cases for further information. 

6 [2005] 2 AC 333.

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