The Cayman Islands’ Attorney General can be restricted from conducting a criminal prosecution of companies that are in the process of liquidation, according to a revision in the Companies Law approved earlier this month by the Legislative Assembly.
The Companies (Amendment) Bill 2007 states: ‘When a winding up (liquidation) order is made or a provisional liquidator is appointed, no suit, action or other proceedings, including criminal proceedings, shall be proceeded with or commenced against the company, except with the leave of the court and subject to such terms as the court may impose.’
The phrase ‘including criminal proceedings’ was added in the revised law.
Attorney General Samuel Bulgin said the issue came up several years ago during the trial of the now-defunct Euro Bank Corporation where there were parallel proceedings.
‘There was some issue about whether the company could be prosecuted without the leave of the Grand Court because the company was in liquidation…under court supervision,’ Mr. Bulgin said. ‘The Grand Court held that it could not be prosecuted and it went to the Court of Appeal. The Court of Appeal said ‘the constitution says that the Attorney General doesn’t need…the consent of anybody to bring a criminal prosecution.”
The change in the law would require that the AG get permission from the court before proceeding with a criminal matter, if the company being investigated was in court-supervised liquidation.
‘It’s just a matter of what is more convenient,’ Mr. Bulgin said.
‘They are not necessarily mutually exclusive…arrangements. You might have a situation where you have a liquidation proceeding going on and it is clear in what came out…that there is criminal behaviour, be it money laundering or fraud or something…and the court would allow (a criminal) investigation.’
The Cayman Islands does not have an agency, such as the Official Receiver in England, or the Australian Securities and Investments Commission, which is responsible for investigating creditor complaints against a liquidated company at the public expense.
The amended Companies Law confirms the ability of the court to require liquidators to assist in criminal investigations of liquidated companies. However, the liquidators would have to be paid for their efforts out of the assets of the liquidated company, in effect taking potentially recoverable money away from creditors.
‘We have instances where the liquidator says ‘yes, we will provide assistance, we’ll provide a statement and we need half a million dollars to write a statement,” Mr. Bulgin said. ‘And the question is whether it is really at their discretion that they should assist in a criminal prosecution, or whether they should be able to be forced to do so.’
The changes to criminal proceedings in liquidation cases were part of a five year review process, which sought to address a number of issues in the Companies Law, many of which dealt with how the islands will treat companies that are subject to foreign bankruptcy laws.
Under one of the amendments, businesses registered under Cayman’s Companies Law that may become the subject of a foreign bankruptcy proceeding must now make filings noting that fact with the Registrar of Companies.
The law also gives the Grand Court power to make secondary orders upon applications of trustees or liquidators who are appointed to oversee foreign companies that are registered in Cayman and subject to bankruptcy or liquidation laws in another country. Those orders can be used to prevent preferential or fraudulent dispositions of a liquidated company’s assets.
Another new section of the Companies Law establishes an Insolvency Rules Committee, to be led by the Cayman Islands’ Chief Justice or his appointee. The five-person committee will have the power to make rules related to liquidation in Cayman and to set fees paid for applications and liquidation proceedings.
Bankruptcy and liquidation proceedings in the Cayman Islands have been under some international scrutiny of late with the recent collapse of two hedge funds owned by US investment company Bear Stearns, and the bankruptcy of an Australian investment company, Basis Yield Capital Fund Management. Both firms sought protection from creditors while attempting to initiate liquidation proceedings in Cayman.
A story written by Bloomberg news service recently stated that the Cayman Islands’ court has a record of favouring management’s wishes in liquidation cases.
Mr. Bulgin said the review of the Companies Law began long before the hedge funds’ bankruptcy issues arose, and called the comments made in the article ‘reckless.’
‘It is unfortunate, indeed regrettable…this sort of bigoted comment has diminished the substance of this article,’ Mr. Bulgin said. ‘These courts have always been very vigilant of protecting all interests; creditors and shareholders.’
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