English law has remained a strong authority in many areas of the world, including the Caribbean Islands many of which are considered to be tax havens for United States’ Citizens. Due to the strict confidentiality laws of the Caribbean Islands and the tax incentives offered to those who move money to the financial institutions located in these jurisdictions, there has been an increase in the number of Ponzi schemes and multi-tiered marketing schemes that have crossed international lines. This could present many obstacles for the United States’ authorities, including court appointed receivers, who are attempting to recover assets for the defrauded investors.
The English Courts and many of the various islands located in the Caribbean have enacted laws which allow their jurisdictions to recognize receivers appointed by a foreign court and to enforce the orders of the foreign court. However, these laws have very strict limitations. One limitation under English Law is that the defendant involved in the action must have sufficient connections with the jurisdiction in which the receiver was appointed. Schemmer v. Property Resources Ltd. [1975] Ch. 273; [1974] 3 All E.R. 451; (1974), 118 Sol. Jo. 716. Another limitation is that the English Courts will not recognize a foreign appointed receiver if recognition of the receiver would result in the enforcement of foreign penal laws. Stutts v. Premier Benefit Capital Trust, 1992-93 CILR 605.
In Schemmer, the Court considered whether the English Court could recognize the receiver appointed by a United States Court. S.E.C. brought an action against several individuals and VCL, a company incorporated in the Bahamas, for alleged violations of the Securities and Exchange Act 1934. The District Court Judge appointed John Schemmer as receiver and instructed him to take possession of certain assets, including all the shares and assets of PRL, a company incorporated in the Bahamas, and the assets of PRL’s subsidiaries. Schemmer, supra. Schemmer issued a writ in England seeking to have himself appointed as receiver of the assets of PRL and its subsidiaries. Id. The English Courts defined four tests for determining whether there are sufficient connections between the defendant and the jurisdiction appointing the receiver: (1) defendant subjected himself/itself to the foreign courts’ jurisdiction, (2) defendant company was incorporated within the jurisdiction of the foreign court, (3) defendant company carried on business within the jurisdiction of the foreign court, or (4) the courts of the jurisdiction where the defendant company was incorporated would recognize a receiver appointed by a foreign jurisdiction. Id. If the receiver cannot show that there are sufficient connections between the defendant and the state where the action was brought, the foreign court’s appointment of a receiver will not be recognized.Id. The English Court determined that the defendant did not submit to the federal jurisdiction where Schemmer was appointed receiver, PRL was not incorporated in the United States, PRL did not carry on business in the United States and there was no evidence that the Bahama Islands would recognize the United States order as effecting the assets located in the Bahama Islands. Id. Thus, there were not sufficient connections to support a holding that the English Courts should recognize Schemmer as receiver.
In Canadian Arab Fin. Corp. (trading as Kilderkin Inv. Grand Cayman) and Kilderkin Inv. Ltd. (both by Clarkson Company Ltd., Receiver and Manager) v. Player, 1984-85 CILR 63, the Grand Court of the Cayman Islands considered whether it had jurisdiction to recognize the receiver appointed by a foreign court. Clarkson Company Limited (“Clarkson”) was appointed the receiver and manager of Canadian Arab Financial Corporation (trading as Kilderkin Investments Grand Cayman) and Kilderkin Investments Limited, both companies were incorporated in Ontario, (collectively referred to as “Kilderkin”) by the Supreme Court of Ontario. Subsequently, Clarkson applied to the Grand Court of the Cayman Islands for an order recognizing him as the receiver and manager and authorizing him to identify and locate all assets of the Kilderkin within the jurisdiction. The Grand Court granted Clarkson’s petition. Mr. Player filed a petition with the Grand Court to rescind its decision to recognize Clarkson as the receiver and manager of Kilderkin on the theory that he, as sole shareholder, was the only person that could properly conduct litigation and defend the assets of Kilderkin. Id. The Grand Court then rescinded its previous order on several grounds, including that there were not sufficient connections between the originating suit brought against Kilderkin and Clarkson’s exercise of control over the assets of Kilderkin located in the Cayman Islands. Id. The Court applied the four tests suggested in Schemmer and determined that Kilderkin was a defendant in the Canadian proceedings and had submitted to the jurisdiction of the Supreme Court of Ontario, Kilderkin was incorporated in Canada, Kilderkin carried on business in Canada and the Ontario Courts would recognize the a foreign appointed receiver. Id. The Grand Court held that it had the jurisdiction to recognize Clarkson as the receiver and manager of Kilderkin under the four tests suggested in Schemmer and restored the initial order of the Grand Court. Id.
It has been firmly established that although the English Courts have the authority to recognize a receiver appointed by a foreign court, it will not enforce a foreign penal law.Stutts v. Premier Benefit Capital Trust, 1992-93 CILR 605. In the absence of similar laws within the Caribbean Islands, these jurisdictions follow the English law. Id.
In Stutts v. Premier Benefit Capital Trust, the Grand Court of the Cayman Islands considered whether the recognition of the United States appointed receiver would be enforcement of a foreign penal law. In this case, the S.E.C. filed a complaint against Premier Benefit Capital Trust (the “Trust”) and its former officers and trustees. Id. at 607. The United States District Court for the Middle District of Florida appointed Charles L. Stutts as the receiver of the trust and empowered him to marshal the assets of the trust. Mr. Stutts filed an application for an order to be recognized in the Cayman Islands as the receiver of the trust. Id. The Grand Court found that there were sufficient connections between the defendant and the jurisdiction appointing Mr. Stutts as receiver of the trust. However, the Grand Court dismissed the application on the basis that the recognition of Mr. Stutts as receiver would give effect to the foreign penal laws of the foreign jurisdiction. Id. at 606. When determining whether recognition of a foreign appointed receiver would give effect to foreign laws, the courts must determine the substance of the right sought to be enforced by the receiver and whether the enforcement would, either directly or indirectly, involve the execution of a law that was penal in effect. Id. The Grand Court stated that “[t]he general statement of principle applied . . . all suits in favor of the state for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue and other municipal laws and to all judgments for such penalties.” Id. The Grand Court examined the nature of the Securities and Exchange Act 1933 and the Securities and Exchange Act 1934 (collectively the “Acts”) to determine whether the Acts were penal in nature. The Grand Court held that the disgorgement proceedings pursuant to the provisions of the Acts were in favor of the state and formed part of the public law and therefore the receiver could not be recognized by the Cayman Islands. Id.
In Marada Global Corp. v. Marada Corp., 1994-95 CILR 546, the Grand Court of the Cayman Islands considered whether a claim to be enforced in the Cayman Islands involved the assertion of foreign penal laws. In this case, the United States District Court appointed a receiver to manage the assets of Marada Global and others and afforded the receiver the power to institute any action deemed necessary and appropriate upon obtaining the District Court’s approval. Id. at 547. After obtaining an order from the District Court, the receiver, standing in the shoes of the management of Marada Global (the “Plaintiff Company”), moved to intervene in an interpleader summons relating to funds held in a Cayman bank and filed an independent action to preserve the funds. Id. The defendant then moved to strike the plaintiff Company’s claim. The Grand Court referred to the five propositions stated in United States v. Inkley, [1989] Q. B. 255; [1988] 3 All E.R. 14428, and held that although the disgorgement provisions of the Acts are penal in nature, this is a claim brought by a company with regard to rights that are available to any private litigant and dismissed the application.Id. at 552.
The Grand Court’s decision in Marada weighed heavily upon the fact that the action brought in the Cayman Islands was brought by a corporation, not the receiver in his name. Under propositions three (3) and four (4) cited by the Court of Appeals in United States v. Inkley, the corporation is treated as a private individual and its claims were considered to be of a personal nature. However, in Stutts, the rights of the receiver that he sought to have enforced included the disgorgement of the defendant’s assets located in the Cayman Islands. The Grand Court found that disgorgement actions under the Acts were penal in nature, not personal claims of the receiver or the investors that he was charged to distribute assets to. Furthermore, the receiver in Marada wasn’t seeking to be recognized in the Cayman Islands as the receiver of the company, whereas in Stutts, the receiver was seeking to be recognized in the Cayman Islands as the receiver of the assets of the trust.
Often in cross-border international fraud schemes funds which the S.E.C. wants to reach for the benefit of investors will lie in both the United States and the offshore jurisdiction. As a result, having the receiver be recognized in the offshore jurisdiction would be ideal; however, it is not possible because of the prohibition on the recognition of foreign penal laws.
The Cayman Islands, which takes a very hostile view to the use of its banking system for money laundering and other illegal activities, has taken a very practical view in these matters. Thus to avoid the Stutts limitation in the S.E.C. v Homa litigation,29 the Grand Court appointed me as a “liquidator” (similar to a receiver) over companies involved in the fraud scheme. This provided the “liquidators” with access to discovery materials in the United States proceeding. Moreover, as both receiver and liquidator, it allowed the coordination of claims and distribution proceedings and streamlined the liquidations. The Grand Court took the same practical approach in the Beacon Hill Hedge Fund liquidations.
“. . . (1) the consideration of whether the claim sought to be enforced in the English courts is one which involves the assertion of foreign sovereignty, whether it be penal, revenue or other public law, is to be determined according to the criteria of English law; (2) that regard will be had to the attitude adopted by the courts in the foreign jurisdiction which will always receive serious attention and may on occasions be decisive; (3) that the category of the right of action, i.e. whether public or private, will depend on the party in whose favor it is created, on the purpose of the law or enactment in the foreign state on which it is based and on the general context of the case as a whole; (4) that the fact that the right, statutory or otherwise, is penal in nature will not deprive a person, who asserts a personal claim depending thereon, from having recourse to the courts of this country; on the other hand, by whatever description it may be known if the purpose of the action is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, it will not be entertained; (5) that the fact that in the foreign jurisdiction recourse may be had in a civil forum to enforce the right will not necessarily affect the true nature of the right being enforced in this country.”
