Pricewaterhousecoopers Bermuda (A Firm) v Kingate Global Fund Ltd ((in Liquidation)) et Al

• Jurisdiction: Bermuda
• Judge: Evans, J.A.
• Judgment Date: 09 May 2011
• Neutral Citation: BM 2011 CA 4
• Docket Number: Civ App 13 of 2010
• Court: Court of Appeal (Bermuda)
• Date: 09 May 2011

Court of Appeal

Zacca, P.; Evans, J.A.; Baker, J.A.

Civ App 13 of 2010

Pricewaterhousecoopers Bermuda (a Firm)

and

Kingate Global Fund Limited (in Liquidation) et al

Appearances:

Crow, QC; Mr. John Riihiluoma, for appellant.

Beltrami, QC; Mr. Chen Foley for respondents.

Company Law - Liquidation — Claim by liquidators against accounting firm for issuing audit opinions that were inaccurate — Contract with accounting firm included clause that they were to be held harmless for any claims except those determined to have resulted from willful misconduct or fraudulent behaviour — Claim dismissed.

Evans, J.A.

1 The appellants, PricewaterhouseCoopers Bermuda (hereinafter “PWC”), were the auditors of two companies now in liquidation, Kingate Global Fund Ltd. and Kingate Euro Fund Ltd. (hereinafter “the Funds”). The Funds liquidators are the Respondents to the appeal. Winding-up Orders were made on 4 June 2009 by the Courts of the British Virgin Islands, where both companies are registered, and on 5 October 2009 by the Courts of Bermuda where they carried on business.

2 Their business was to act as ‘Feeder Funds’ in Bermuda for the investment business carried on by Bernard Madoff in New York. They attracted investment funds that were forwarded to Bernard L. Madoff Investment Securities LW (“BLMIS”) there. They delegated all investment decisions to BLMIS which affected to use a ‘split-strike conversion’ investment strategy and reported excellent returns year after year. Those proved illusory after the notorious arrest of Mr. Madoff in December 2008. Total investments through the Funds from inception in 1994 until 2008 were measured in billions of dollars, and as a result of the collapse the Funds have lost “many hundreds of millions of dollars”. PWC acted as the Funds auditors in Bermuda over the whole of this period and issued unqualified audit opinions annually for (at least) the years after 2003 which are now known to have been inaccurate.

3 The Liquidators have issued proceedings against PWC in Bermuda claiming damages for negligence, but they have been made aware that the terms on which PWC was engaged by the Funds included “a contractual right to be indemnified and held harmless for any claims “except to the extent finally determined to have resulted from the wilful misconduct or fraudulent behaviour of Price WaterhouseCoopers relating to such services”(Ruling of Kawaley, J. dated 20 August 2010). They are aware that the Statement of Claim, if it does not particularise allegations of wilful default or fraud, may be liable to be struck out, with the result that the action would not proceed to the stage where PWC would have to disclose all relevant documents they possess. Therefore, the Liquidators applied for Orders under section 195 of the Companies Act, 1981 (corresponding to section 236 of the United Kingdom Companies Act, 1948) requiring a representative of PWC “to produce any books and papers in his custody or power relating to” the Funds. Kawaley J. made the Orders on 20 August 2010 and PWC now appeals.

4 PWC-s objections to the Orders and its grounds of appeal are wide ranging. It contends that the judge was wrong to exercise his discretion in favour of making the Orders under section 195. It further contends that the Bermuda Courts had no jurisdiction to make the winding up Orders in September/October 2009, which ought to be set aside. It submits that it is entitled to raise that issue without appealing against those Orders, but in the alternative it seeks an extension of the time within which to bring an appeal.

5 The question whether the Bermuda Courts have power to make a winding up order in relation to an Overseas Company, which the Funds are for the purposes of the Companies Act, 1981, when the company is a Mutual Fund that is exempt under section 133A from the requirement to obtain a permit from the Minister under sections 133 and 134 to carry on business in Bermuda, is an important and much-debated issue before the Supreme Court. In the present case, Kawaley, J. described the submissions made by Mr. Riihiluoma on behalf of PWC as a “full-blooded assault on the legal foundations of first-instance un-opposed judgments and academic writings upon which the conventional wisdom on this Courts winding-up jurisdiction in respect of overseas companies is based”, and he reserved judgment accordingly (Ruling dated 20 August 2010 para.8). He rejected the submissions (para.8). He held, first, that PWC “lacks the standing to challenge the validity of the winding-up order made herein save by way of appeal”, and secondly, that the Courts had jurisdiction to make the order, in any event (para.108).

6 Jonathan Crow QC presented PWC's appeal on the basis that it raised a central issue as to the Court's jurisdiction to make the winding-up orders in the case. If there was no jurisdiction, he submitted that it became necessary decide whether PWC has legal ‘standing’ to raise the issue, without appealing against the Orders, or if not, whether its time for appealing should be extended until September 2010 when Notice of Appeal was given. Adrian Beltami QC on the other hand contended for the Liquidators that PWC has no such standing and that its time for appealing should not be extended. If that was correct, any decision on the central jurisdiction issue would be obiter unless and until PWC succeeded in an appeal to the Judicial Committee of the Privy Council on the preliminary issues, and he made his submissions on those issues first.

7 Having heard Mr. Crow's reply submission on the preliminary issues, the Court decided to dismiss the appeal on those grounds and not to hear further argument on the central jurisdiction issue. That issue involved questions both of statutory interpretation, which the Judge decided in favour of the Liquidators, and as to whether the Court has common law powers to assist the Liquidators appointed in the BVI liquidation. The Judge decided the common law issue in favour of PWC by a further Ruling dated 17 January 2011 against which the Liquidators appealed.

8 The Court expresses no view on either aspect of the jurisdiction issue. PWC's appeal was dismissed for the reasons given below.

DOES PWC HAVE LEGAL STANDING TO CHALLENGE THE WINDING UP ORDERS?

9 “The principle that a winding-up order cannot be impeached in the context of an application made under it is founded on obvious good sense. A winding-up order affects not only the petitioner, the company and the person by or against whom any application is made in the course of the winding-up, but also other creditors and contributories. It could not be acceptable for a court dealing with an application between the liquidator and a particular respondent - whether creditor, debtor, contributory, officer or third party…… - to treat the winding-up order as of no effect while the liquidation continues as between the liquidator and others interested in the winding-up. Either there is a valid liquidation or there is not - the liquidation cannot be effective in relation to some and ineffective in relation to others. If it is to be held ineffective in relation to all that decision must be made in proceedings - whether on an application to rescind the winding-up order or on appeal from it - in which all those affected have an opportunity to be heard.” (per Chadwick, L.J. in Re Mid-East Trading Ltd. [1998] 1 All E.R. 577 at 584.)

10 That proposition is challenged by PWC in the present case. It does so primarily on the basis of a nineteenth-century authority that was not cited in the Mid-East Trading Ltd. case, namely, the decision of the Court of Appeal in In re Bowling and Welby's Contract [1895] 1 Ch.663. But its submission also relies on the need to reconcile the proposition with the recognised principle that a winding-up order is not an order in rem, in other words, it does not create a status that is binding on The whole world'. As Lord Hoffman said recently in Cambridge Corporation v. Unsecured Creditors [2007] 1 A.C. 508 (JCPC)

• “13. Mr. How& s submissions as to the rules of private international law concerning the recognition and enforcement of judgments in rem and in personam are of course correct…… But their Lordships consider that bankruptcy proceedings do not fall into either category. Judgments in rem and in personam are judicial determinations of the existence of rights: in the one case, rights over property and in the other, rights against a person. When a judgment in rem or in personam is recognised by a foreign court, it is accepted as establishing the right which it purports to have determined, without further inquiry into the grounds upon which it did so. The judgment itself is treated as the source of the right.

• 14. The purpose of bankruptcy proceedings, on the other hand, is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established. That mechanism may vary in its details……

• 15. The important point is that bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them.” (Page 516)

11 The Judge addressed this issue in section D of his Ruling dated 20 August 2010. It had not been raised by PWC in their challenge to the Orders, but the Liquidators' response began –

“12. The applicants' first response to this contention is that it is simply not open to the Respondent on this Application. The applicants have in fact been appointed under the Winding up Orders and, given those orders; the jurisdiction under section 195 is necessarily engaged. The Respondent cannot advance by way of defence on this application a collateral attack on extant orders of this Court……. it is an abuse of process to mount an indirect challenge in the course of separate proceedings. Absent any...