The Privy Council held that a Liquidator could pursue a recipient of $13m as a preference outside of the jurisdiction, some 17 years after the company went into Liquidation.
ZCM Asset Holding Company (Bermuda) Ltd was incorporated and resident in Bermuda. Its role was to act as sub-custodian under custody agreements between Zurich Bank and various counterparties, including American Express Offshore Alternative Investment Fund (“AMEX”).
AWH Fund Ltd was incorporated as an international business company (“IBC”) formed under the International Business Companies Act 2000 (“IBCA”) in the Bahamas.
AWH registered shares in the name of ZCM “for the benefit of AMEX”. For AMEX to redeem its AWH shares, it had to request ZCM to give notice to AWH to redeem the shares. ZCM did this on AMEX’s behalf in April 2002. On 30 July 2002, AWH made a redemption payment to ZCM of over $13 million. AWH subsequently went into compulsory liquidation in the Bahamas, following a Winding Up Petition presented on 17 October 2002.
The Liquidator of AWH sought orders that payments to ZCM be declared void as undue or fraudulent preferences pursuant to section 160 of the IBCA.
The Bahamas Supreme Court gave the Liquidator leave to serve an amended summons on ZCM out of the jurisdiction in Bermuda, and this was served on 30 September 2008. ZCM applied to set aside the order for service of the proceedings on it on the grounds of lack of jurisdiction and lack of a good arguable case on the merits. This application was successful at first instance in the Supreme Court of Bahamas but not on appeal to the Court of Appeal, the highest domestic Court in the Bahamas. ZCM subsequently appealed to Privy Council.
The Privy Council noted that three sets of rules in The Bahamas were relevant to this application; the Bankruptcy Rules, the Companies (Winding Up) Rules 1975 (“WUR”) and the Rules of the Supreme Court of the Bahamas (“RSC”).
There is no power in the Bankruptcy Rules or the WUR to order bankruptcy proceedings to be served out of the jurisdiction. However, the Liquidator relied on WUR 101, a “gap filling provision” which enables the RSC to be used where the WUR makes no provision. The RSC provide for circumstances in which the court may give leave for service out of the jurisdiction of proceeds but not explicitly bankruptcy proceedings.
ZCM argued that It was well established that the extraterritorial effect of legislation does not apply to s160 IBCA and that it was the deliberate policy of the legislature that there should be no possibility of service out of the jurisdiction.
AWH’s Liquidator argued that IBCs were intended to attract foreign investors and they should not reap the benefits of an IBC without being subject to its law. It was argued that there was sufficient connection between ZCM and The Bahamas.
The Privy Council noted that it is now settled law that insolvency provisions can have extraterritorial effect, referring to Paramount Airways and a number of other cases. It was noted that there needs to be some connection between the jurisdiction of the court giving leave for service out of the jurisdiction and the respondent on whom service is ordered. In this case, the redemptions took place outside The Bahamas but related to shares of a Bahamian company and this was held to be a sufficient connection with the jurisdiction. The Privy Council held that the Court of Appeal was correct to hold that the Supreme Court had power to give leave for service out of the jurisdiction.
The final test to be satisfied before granting leave was the Privy Council had to be satisfied that there was a good arguable case.
ZCM argued that direct evidence of intention to prefer had to be shown and could not be inferred, but the Privy Council rejected this, stating that it could be inferred from other evidence. There was evidence to show AWH knew itself to be insolvent and therefore had the requisite intention to prefer.
ZCM submitted that it held its AWH shares as bare trustee for AMEX and so could only act as AMEX instructed and accounted to AMEX for the redemption monies received, and that they should not be the respondent in these proceedings. The Privy Council set out that a creditor is a person who would be entitled to prove in the Liquidation, and there was no doubt that ZCM would have been that person if AWH had not satisfied the redemption request. The Privy Council therefore rejected ZCM’s argument that its position was analogous to an agent acting in good faith accounting to its principal.
The Privy Council therefore held that ZCM was the right respondent to the summons but that it was open to them to pursue any remedy against AMEX.
It was ultimately held that the evidence showed a sufficiently arguable case, and that ZCM’s appeal should be dismissed.