Cayman Judge Rejects US Receiver's Request In PAAF Case

by Leroy Baker, Tax-News.com, New York

04 May 2006

A Cayman Islands judge has "resoundingly reaffirmed" the principle that the laws and courts of the jurisdiction will govern the liquidation of a Cayman incorporated company when it is wound up, according to Walkers, the offshore legal firm.

Last month, Judge Henderson threw out an attempt by Clark Hodson, a US court-apointed receiver, to take over the liquidation of PAAF, a hedge fund registered in the Cayman Islands and regulated by the Cayman Islands Monetary Authority (CIMA).

PAAF collapsed in 2005 after the discovery of a substantial trading loss, which had been hidden from investors.

Hodgson had argued that a liquidation in the Cayman Islands would serve no practical purpose and would mean a duplication of effort, delay and increased costs. He also called for the distributions made to investors to be carried out in accordance with US law.

However, commenting on the case, Rob Gardner and Guy Locke of Walkers observed that: "It is an overriding principle of Cayman law that, when a Cayman incorporated company is wound up, the laws and Courts of this jurisdiction will govern the liquidation. This principal was resoundingly reaffirmed by Judge Henderson in the matter of Philadelphia Alternative Asset Fund Limited."

They added that:

"There is a line of English and Cayman Islands' cases which provide for the recognition of receivers, the principal one being Kilderkin v Player [1984] CILR 63. However, none of these authorities provide for recognition, in the Cayman Islands, of a foreign appointed receiver of a Cayman Islands' incorporated company."

"Such receiverships have always related to foreign incorporated companies (or other entities, including trusts), where the foreign receiver has sought recognition in Cayman in order to repatriate assets located here, belonging to the entity, to the place of incorporation or establishment."

Gardner and Locke observed that Judge Henderson followed established principles by appointing representatives of Kroll (Cayman) Ltd as Official Liquidators and refusing the Receiver's application for recognition.

"The Honourable Judge relied on the fundamental principle that as Cayman is the domicile of the company, the liquidation must be governed by Cayman Islands' law and supervised by the Grand Court, as established in the United Kingdom in cases dating from the late 19th century," they noted.

"Any arguments as to duplication of effort are quite unable to displace this principle, and have to be dealt with, and in many cases are satisfactorily addressed through, cooperation between a Cayman liquidator and the US regulatory receiver," they added.

Mr Gardner stated that the judgement has received a thorough welcome from practitioners and investors.

"If the Grand Court had deferred to the foreign receivership, particularly in a case like this where a significant fund has collapsed in circumstances of massive fraud, investor confidence in the treatment of Cayman Islands incorporated funds could have been severely damaged," the lawyers concluded.

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