Modified universalism - the Guernsey perspective

Service area ⁄ Dispute Resolution and Litigation Location ⁄ Guernsey Date ⁄ February 2014

The Royal Court has recently given clear guidance on the Monies invested as part of that process are alleged to have application of the principle of modified universalism to been transferred to the hedge funds for onward investment. matters in Guernsey. The CFTC obtained an order appointing a Receiver over the assets of Mr Battoo and his related entities (the “US Receiver”) The case of EFG Private Bank (Channel Islands) Ltd v. BC and liquidators have been appointed over a number of the Capital Group (in ) & Ors [34/2013] will have defendant entities in the US proceedings (the “Bahamas significant consequences for cross- border with a Liquidators”). Both the Joint Liquidators and the Bahamas Guernsey element, as it sets out for the first time the principles Liquidators have been formally recognised by the Royal Court which the Royal Court should consider when assessing the in Guernsey, however the Receiver was unsuccessful in its nature and extent of its obligation to provide “active application for recognition (which is currently subject to assistance” to foreign insolvency proceedings. appeal).

Background The Joint Liquidators sought a stay of the Guernsey proceedings and the repatriation of the Assets to the BVI in Interpleader proceedings were issued in March 2013 by EFG order to progress the (which would include an Private Bank (Channel Islands) Limited (“EFG”) in respect of assessment of and investor claims to the Assets). Both assets held in accounts in Guernsey (the “Assets”), on behalf of the US Receiver and the Bahamas Liquidators opposed the a number of hedge funds which were incorporated in the BVI application on the basis that Guernsey was the most (in one case, in Anguilla). The hedge funds are in liquidation, appropriate forum for the determination of the issue of title to with two BVI insolvency practitioners appointed as joint the Assets. liquidators (the “Joint Liquidators”).

The need for the interpleader proceedings arose as a result of two civil complaints being brought in the United States of America. The U.S. Securities and Exchange Commission (the “SEC”) and the U.S. Commodity Futures Trading Commission (the “CFTC”) filed civil complaints against Mr Nikolai Battoo and a number of entities owned or controlled by him as a consequence of an allegedly fraudulent scheme which he employed to mask losses suffered by various investment portfolios due to the Madoff Ponzi scheme. It is alleged that Mr Battoo induced investors to plough further funds into the investment portfolios in order to fund redemption payments to existing investors.

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BRITISH VIRGIN ISLANDS CAYMAN ISLANDS GUERNSEY JERSEY CAPE TOWN HONG KONG LONDON SINGAPORE careyolsen.com The substantive issue • The Court has an obligation pursuant to inter-jurisdictional comity or co-operation to render active assistance to the The principal issue faced by the Deputy Bailiff centred around liquidation processes taking place overseas but, in doing so, the nature and extent of any duty the Royal Court may owe in it has to determine what the assistance amounts to. It is terms of providing assistance to those conducting foreign clear that the Court is not bound to accede to any assistance insolvency proceedings. requested; the assistance sought must be that which the The principle of universalism in insolvency matters provides Court can properly and sensibly do to assist, rather than that there should be a sole liquidation receiving worldwide frustrate, the foreign insolvency. recognition and assistance from Courts and office holders • The Court must consider carefully whether (in this case) the based in other jurisdictions. The Joint Liquidators argued that question of determining the ownership of assets is some when this is applied in the current context, it would mean that form of particular relief available in the insolvency process the BVI and Anguilla Courts should be allowed to determine or an ordinary question of resolving the civil rights and any dispute as to ownership of the Assets, and that the obligations of competing claimants. interpleader proceedings in Guernsey ought to be stayed as • A factor to bear in mind in considering whether to stay the part of the Royal Court’s rendering active assistance to those (Guernsey) Interpleader Proceedings is the doctrine of liquidations. In response, the US Receiver and the Bahamian forum non conveniens (i.e. whether another jurisdiction is Liquidators submitted that the questions raised by the clearly and distinctly a more appropriate forum (than application should be determined by reference to the doctrine Guernsey) to determine the central issues in the case). of forum non conveniens. • The role of the Royal Court is to assist and certainly not to frustrate foreign insolvency proceedings; it should The Royal Court’s decision endeavour to ensure that no party seeks to take an unfair The Deputy Bailiff treated the stay and repatriation elements advantage by virtue of them litigating issues in Guernsey. of the application as being necessarily linked; a favourable • Ultimately, the discretion available to the Court must be decision in respect of the stay would be of little assistance exercised judicially, with a view to achieving fairness and without unfettered access to the Assets – otherwise, each time justice as between all parties. a distribution was approved in the BVI, a Court application in Guernsey would be necessary to effect that distribution. In the absence of any clear guidance previously, this decision will be of great assistance to foreign office holders. In In delivering his judgment, Deputy Bailiff McMahon held that appropriate cases, they can seek the assistance of the Royal there was necessarily some overlap between the principle of Court with a view to avoiding becoming embroiled in litigation universalism and the doctrine of forum non conveniens, in a number of different jurisdictions. treating the latter as having a role to play in the determination of the applicability of the principle of universalism and The Deputy Bailiff ultimately distinguished the present case therefore the extent of the Royal Court’s obligation to provide from other cases involving the principle of universalism by assistance. stating that the determination of the question of ownership is a step outside of the insolvency process itself (and therefore • The Deputy Bailiff thoroughly reviewed the authorities in this involves mainstream civil litigation rather than any particular area and agreed with the Joint Liquidators that the principle type of insolvency-related litigation). Nevertheless, the key applied to the Royal Court and that the question was not issue of guidance in this area has now been addressed. simply one of forum non conveniens. In doing so, he set out the following helpful guidance for assessing the nature and scope of the Royal Court’s ability to provide active Comment assistance to a foreign insolvency: The overview of the principles of universalism as they apply in • The existence of foreign liquidation proceedings does not Guernsey to insolvency-related matters is useful for office result in an automatic stay of the Guernsey Interpleader holders and practitioners seeking the aid of the Royal Court for Proceedings; the Royal Court retains a discretion to regulate the purposes of progressing foreign liquidations. That these its own proceedings. principles have now been recognised in Guernsey is a helpful step forward for those facing similar situations in the future, • The burden of satisfying the Court that staying the particularly at atime when conflicts between competing office proceedings is a proper and appropriate course of action holders are increasing. rests on the applicant. • In determining how to exercise the Court’s discretion, proper The application of those principles in the current case was less regard must be had to the principle of universalism in helpful. However, the current case provides sufficient insolvency proceedings. opportunity for the application of the principles to be distinguished on a case by case basis.

It remains to be seen how much of an impact this decision will have, safe to say that it is a positive step forward for Guernsey and reflects well on the jurisdiction’s ability and willingness to act and adapt as the financial markets move forwards.

Continued

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Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such. © Carey Olsen 2017

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