Re Kingate Global Fund Ltd ((in Liquidation))

• Jurisdiction: Bermuda
• Judgment Date: 17 January 2011
• Date: 17 January 2011
• Docket Number: Commercial Jurisdiction 2010 No. 262
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Commercial Jurisdiction 2010 No. 262

In the matter of Kingate Global Fund Ltd (in liquidation)

and in the matter of Kingate Euro Fund Ltd (in liquidation)

and in the matter of section 195 of the Companies Act 1981

Mr C Hill for the Joint Liquidators

Mr J Riihiluoma for PricewaterhouseCoopers

The following cases were referred to in the judgment:

Malone v Metropolitan Police CommissionerELR [1980] 1 QB 49

Al-Sabah v Grupo Torres SAELR [2005] 2 AC 333

Re Phoenix Kapitaldienst GmbH [2008] BPIR 1082

Dreyfus v Peruvian Guano CoELR (1889) 61 ChD 151

Re JN Taylor Finance PtyUNK [1999] BCC 197

Re Impex Services Worldwide Ltd [2004] BPIR 564

Cambridge Gas Transport Corporation v Navigator Holdings plcWLR [2006] 3 WLR 689

Re Bermuda Worker's Cooperative SocietyBDLR [1998] Bda LR 36

Re Founding PartnersBDLR [2009] Bda LR 35

Hughes v Hannover Ruckversicherungs-AGUNK [1997] BCC 921

Abstract:

Hedge funds in liquidation in BVI - Ancillary liquidation in Bermuda - Whether auditors partly responsible for losses - Failure to detect fraud - Common law discovery

RULING of Kawaley, J

Introductory

1. The applicant companies are hedge funds in liquidation in the British Virgin Islands ("BVI"), where they are incorporated, and in Bermuda where ancillary liquidation proceedings have also been commenced. Although incorporated in BVI they were substantially managed from Bermuda and served as feeder funds for investments placed with Bernard L. Madoff Securities LLC in New York. Based on the assumed value of these investments and prior to Bernard Madoff's December 2008 arrest, the two Funds had combined net assets values in excess of US$3 billion.

2. The JLs are attempting to ascertain whether PwC Bermuda, the companies' former auditors, may be partly responsible for the substantial losses sustained by the creditors due to their failure to detect the Madoff fraud. Because of the indemnities contained in the auditors' letter of appointment it is unlikely that the JLs will, without the "pre-trial discovery"1 liquidators are uniquely entitled to pursue, be able to plead a case capable of surviving a strike-out application.

3. The background to both these proceedings is set out in the Introduction to my August 20, 2010 Ruling in 2009: Nos. 270 and 2712 when this Court (a) granted an application by the ancillary Joint Liquidators under section 195 of the Companies Act 1981 requiring PwC Bermuda to produce various documents, and (b) rejected PwC's contention that this Court lacked the jurisdiction to wind-up the companies as Part XIII of the 1981 Act did not apply to them as overseas companies operating in Bermuda lawfully but without a permit. An appeal against this Ruling, pursuant to leave granted by me on or about September 16, 2010, is scheduled for hearing before the Court of Appeal for Bermuda on March 15-16, 2011.

4. In an attempt to protect themselves against the eventuality that any section 195 Order obtained in the ancillary liquidation proceedings might be set aside on appeal, the JLs applied to this Court by Originating Summons dated August 9, 2010 pursuant to a Letter of Request from the BVI Court for (a) common law recognition of the status of the JLs, and (b) common law assistance by way of a discovery order in the same terms as the section 195 Order granted on August 20, 2010 under the 1981 Act. On August 13, 2010, on an ex parte basis, I ordered that:

"1. That the appointment of the BVI Joint Liquidators is hereby recognized by this Court.

2. That the Joint Liquidators shall have such powers as would be available to them under Part XIII of the Companies Act 1981 as if they had been appointed liquidators under a compulsory liquidation pursuant to Section 170 of that Act and in particular but without prejudice to the generality of the foregoing:

a. To locate, protect, secure and to take into their possession and control all assets and property within the jurisdiction of the Supreme Court to which the Companies are or appear to be entitled;

b. To locate, protect, secure and to take into their possession and control the books, papers and records of the Companies including the accounting and statutory records within the jurisdiction of the Supreme Court;

c. To retain and employ barristers, solicitors or attorneys and/or such other agents or professional persons as the Joint Liquidators consider appropriate for the purpose of advising or assisting in the execution of their powers.

3. That anything that is authorized or required to be done by the Joint Liquidators may be done by all or any one of the persons appointed.

4. That for so long as the Companies remain in liquidation in the British Virgin Islands, no action or proceeding shall be proceeding shall be proceeded with or commenced against either of the Companies or their property within the jurisdiction of the Supreme Court except with the leave of the Supreme Court and subject to such terms as the Supreme Court may impose."

5. By Summons dated November 12, 2010, the JLs applied for an Order in substantially the same terms as the Order made under section 195 in the ancillary liquidation proceedings in august 2010. PwC Bermuda opposes the present application on the grounds that (and assuming that its pending statutory jurisdiction appeal succeeds):

i. this Court has no jurisdiction to apply section 195 to the applicant companies, and

ii. further and alternatively, there is no general common law legal power to order discovery which this Court can validly deploy in aid of foreign liquidation proceedings.

6. Counsel indicated at the end of the hearing of the present application that they hope that any appeal against the decision on the present application can be considered by the Court of Appeal together with the listed appeal dealing with the statutory jurisdiction (and section 195 merits) application in March this year. I agree with the desirability of such a course.

7. The present application raises a narrow point of considerable practical interest to insolvency stakeholders dealing with jurisdictions such as Bermuda which have yet to enact modern statutory provisions either (a) facilitating international cooperation in cross-border insolvency cases, or (b) unambiguously conferring winding-up jurisdiction over overseas companies. The crucial question is whether the general discretionary common law duty to assist foreign insolvency proceedings which qualify for common law recognition embraces the power to make discovery orders sought by liquidators

applying either (1) the principles embodied in statutory investigation provisions which are not for jurisdictional reasons applicable to the applicant companies, or (2) other general jurisdictional powers. It is not disputed that this Court has validly recognised the appointment and status of the JLs and may...