In June 2021, Daniel Hall and Michael Redman, Managing Directors and co-leads of global corporate intelligence at Burford, posed questions on major legal developments in the offshore markets over the past 18 months and economic trends that will play out in the markets post-pandemic to leading litigators, insolvency practitioners and financial professionals in the region
A recent act in the Cayman Islands, the Private Funding of Legal Services Act 2020 (PFLSA), which came into force in May 2021, permits third-party funding in a much wider range of proceedings and allows law firms to enter into contingency fee agreements. How do you anticipate this law changing the way law firms interact with their clients and how will it benefit both the claimant and the representing attorney?
John O’ Driscoll: The issue prior to PFLSA was that litigation funding agreements were subject to advance approval by the Grand Court on a heavily restricted basis. They were all but unknown in commercial cases as a result of the continued existence of maintenance and champerty as criminal offenses, and the availability of litigation funding remained scarce. With the increased certainty provided by PFLSA, we anticipate an increase in claims. However, there is likely to be a short delay in uptake initially as the act specifically applies only to causes of action which have accrued since it came into force.
Laura Hatfield: In reality, litigation funding has been available for over 15 years (particularly in the insolvency space), but PFLSA removes the need to carefully avoid landmines of champerty and maintenance lurking around alternative financing—which often adds a layer of costs in obtaining advice and court confirmation. The law also allows for contingency fee arrangements, either based on value of recoveries or an uplift on normal fee rates as a success fee. Cases that were unable to proceed because of a lack of finance can do so, and claimants will get compensation where otherwise there will have been none.
Christopher Smith: PFLSA is still in its infancy, but if it achieves its intended purpose, it should allow for a much wider use of litigation finance and flexible fee arrangements between claimants and their attorneys. From a claimant’s perspective, the most obvious benefit is that it allows claims to be brought that might otherwise have been difficult to pursue due to a lack of resources. From the attorney’s perspective, the main benefit is commercial given the uplift in fees in the event of a successful claim. It remains to be seen what appetite Cayman Islands’ attorneys will have for increased risk versus potential increased recovery in these new contingency fee arrangements.
Matthew Brown & Jonathon Milne: Nowadays, litigation funding and other alternative fee arrangements are commonly viewed as necessary components of a sophisticated and high-functioning legal system. The Grand Court of the Cayman Islands has expressly recognized the shift in the tide of public interest. The principal objective of the act is to remove any lingering uncertainty in relation to the status of litigation funding in the Cayman Islands. The introduction of clear parameters through bespoke legislation is likely to bring benefits to claimants, funders and their attorneys. While the Cayman Islands is among the first offshore jurisdictions to implement specific litigation funding legislation, they have the benefit of learning from and following the lead of other sophisticated onshore common law jurisdictions, such as the UK and Australia.
Tim Prudhoe: The act is welcome and overdue; the tensions inherent in a contingency “onshore” will be no different in Cayman. The main impact will be the improved access to justice.
Do you believe that the PFLSA may act as a trigger for other jurisdictions in the Caribbean Islands to create their own versions of the law? If so, how do you see this changing the litigation finance and legal landscape?
Matthew Brown & Jonathon Milne: Cayman Island decisions on third party funding are definitely being seen and emulated in other jurisdictions. For example, courts in the British Virgin Islands (BVI) have expressed support in general terms for third-party litigation funding. In late 2020, In the Matter of Exential Investments, Inc., a third-party litigation funding agreement was approved in the BVI. Citing the Cayman Islands decision of Segal J in A Company v. A Funder (2017), Honorable Justice Jack in the BVI Commercial Court held that a proposed funding arrangement to be entered into between liquidators and a third party funder was “essential to ensure access to justice.”
Christopher Smith: While the recently sanctioned funding agreement between BVI liquidators and third-party funders is relatively new, it is expected to increase the appetite for third party funders to get involved in litigation in the BVI. The increasing prevalence of litigation funding and flexible fee arrangements in the Caribbean and elsewhere will likely encourage other similar jurisdictions to follow suit, possibly leading to an increase in both the number of funders and the number of claims being pursued.
Tim Prudhoe: I know that the Cayman legislation is being leveraged elsewhere in the region because I have used it myself.
Laura Hatfield: Other Caribbean jurisdictions such as Bermuda are also following in the same path as the Cayman Islands where the judiciary is interpreting the existing law to enable access to justice. The existence of the PFLSA will make the discussion on legislative change or clarity a priority in these jurisdictions. Reform may take a few years, however, given that most governments have pandemic recovery uppermost in their minds.
Are human rights or access to justice issues a basis to open the door to litigation funding, given the tendency of offshore jurisdictions to have written constitutions stating as much, and will this also improve its prospects for becoming available to commercial clients?
Matthew Brown & Jonathon Milne: Although many jurisdictions in the Caribbean have written constitutions, many also apply the common law, and access to justice is a fundamental principle enshrined in the common law. It was the common law principle that Jack J relied upon in the Exential Investments, Inc. case.
Laura Hatfield: A written constitution which states that there is a right to access to justice will help make the argument that denying litigation funding is a breach of human rights. However, most judicial work in litigation funding has been done in commercial litigation and insolvency fields without recourse to constitutional arguments.
Tim Prudhoe: The somewhat “indirect” route of leveraging human rights challenges will likely be the agent of change needed. For example, in the Turks and Caicos Islands, that is precisely the strategy my firm and I have adopted and have two reserved decisions on funding issues. One of those is in the context of insolvency. It is likely that it will take appellate activity to clarify the position under TCI law. It currently looks like the first instance decision will be that primary legislation will be required. We are ready for that.
The Caribbean islands were deeply affected by the pandemic in 2020, with the economy contracting by 8.6%. A mild recovery of 3.5% was projected for 2021. With that in mind, how has the economy recovered this year and what are some concerns for the region?
Christopher Smith: The two main pillars of the Cayman Islands economy are financial services and tourism, and tourism has been effectively frozen since March 2020. From the financial services perspective, the Cayman Islands have weathered the storm extremely well. The government was quick to introduce a series of economic stimulus measures to support individuals and businesses, but any recovery this year, particularly tourism, will be reliant on borders reopening. In terms of potential concerns, there is obviously some uncertainty around what a post-pandemic world will look like and many people may be reluctant to travel when it becomes possible later this year.
Laura Hatfield: The Cayman Islands economy, despite borders being still largely closed, did better as a whole than projected as the financial service insurance sector, a mainstay of the economy, only contracted by 0.7%. As vaccine roll out reaches critical mass, the Caribbean Islands’ economies will benefit as the hospitality sector returns to pre-pandemic levels with some potentially unprecedented demand in winter 2021. Not every pre-pandemic business will survive and there may will be shifts towards less vulnerable commercial activity. There is also an increasing concern of shortages in construction materials and of expat workers which may result in some drag on the recovery.
Matthew Brown & Jonathon Milne: On an optimistic note, tourists are already returning in droves to many locations throughout the Caribbean. At the risk of stating the obvious, the speed and recovery of the tourism sector will have a major impact on the economic fortunes of the entire region.
Chapter 15 filings dramatically increased in 2019 and 2020, including in the Cayman Islands and BVI. For example, Caribbean telecommunications provider Digicel filed in 2020 with $7.4 billion in outstanding debt. Could you talk more generally about bankruptcy and insolvency trends in offshore markets in 2021?
Laura Hatfield: The overwhelming trend is for restructuring rather than liquidation. To date, any company asking a court for its help to avoid bankruptcy has almost always been given a chance, but increased scrutiny of the genuine desire and the ability to restructure is now being applied to both situations. There is also increased scrutiny by judges on the real need for the proposed multi-jurisdictional applications, which may not achieve much more than an increase in professional fees.
Christopher Smith: The one thing we’ve seen towards the end of 2020 and the first half of 2021 is an increase in the use of “light touch” provisional liquidation to facilitate the restructuring of a larger group. The provisional liquidation process provides a moratorium and an automatic stay on proceedings against a company, allowing breathing space for the company to propose an arrangement or compromise. The idea is that the company can exit the provisional liquidation following restructuring and continue as a going concern.
Often these applications involve Cayman entities listed on the Hong Kong stock exchange with operations in mainland China seeking to refinance or deleverage their debt; however, a number of recent decisions by Justice Harris in the Hong Kong Companies Court have caused doubt on the efficacy of this approach. It remains to be seen whether this trend continues during the second half of 2021.
John O’Driscoll: In general, across both the Cayman and BVI, we are seeing creditors explore their options in terms of enforcement. Many creditors are not yet pulling the trigger on enforcement but have well formulated plans if they decide to go down that route. From a Cayman perspective, following the presentation of a winding up petition against a company without leave of the Grand Court, a secured creditor will be entitled to enforce its security without leave of the Grand Court and without reference to any appointed liquidator.
In terms of the type of companies that we have seen in distress, we have seen activity in the resources, aviation and retail sectors. In terms of regions, we have seen an uptick in resources work out of Africa and the Middle East.
Matthew Brown & Jonathon Milne: In the Cayman Islands, there are proposed amendments to the Companies Act that would allow Cayman companies to restructure their debts outside of a formal insolvency process under a qualified insolvency practitioner acting in the capacity of a “restructuring officer.” This is a welcome development in light of the increasing number of schemes of arrangements being implemented as a means to restructure groups via holding companies domiciled in the Cayman Islands.
The BVI is also expected to see an increase in restructuring and insolvency work in the coming months. Following the decision in Constellation Overseas Ltd. (2018), it is clear that the Commercial Court is able to appoint “soft touch” provisional liquidators. We expect to see this power utilized more frequently in the coming months and into 2022.
Tim Prudhoe: The continued increases and market for specialist counsel will be buoyant. Modern insolvency legislation is increasingly prevalent in the region, which itself will generate opportunity, subject to funding issues.
Earlier this year, the BVI amended a Supreme Court Act (Section 24A) to confirm that its court has the authority to grant injunctive relief in support of foreign proceedings. With the BVI arbitral seat increasingly popular, what effects does the amendment have to arbitral proceedings in the region?
Owen Prew: The Supreme Court Act came about as a result of the decision in Broad Idea International Limited v Convoy Collateral Limited, which is still being appealed to the Privy Council. The Arbitration Act 2013 already empowered the BVI court to grant interim relief in foreign arbitration proceedings, and so arbitrations in the BVI were largely unaffected by either the Broad Idea decision or the introduction of the Supreme Court Act in 2020. The only advantage now is that the definition of “proceedings” under the Act is broad enough to encompass arbitral proceedings as well. It therefore supplements the existing powers already contained in the Arbitration Act.
John O’ Driscoll: It is true that this is a positive development for the BVI. Section 24A remedies a lacuna in the BVI legislation which did not previously provide for the court to grant interim remedies in support of proceedings on foot outside the BVI.
With the Charging Orders Act 2020 as an example, do you anticipate further pro-creditor legislation in the BVI? Is the region’s shift to becoming less debtor-friendly a positive development for business?
John O’ Driscoll: The Charging Orders Act 2020 is a strong message that the BVI’s policy and intention is to ensure that rogue judgment award debtors cannot use asset protection structures to evade enforcement. It is a positive message for the BVI to send at this time. Matthew Brown & Jonathon Milne: It is certainly a positive development for business and the jurisdiction as a whole. As the then BVI Attorney General said, during the second reading of the bill that would eventually become the Charging Order Act 2020, “The enactment of this bill will demonstrate that the territory is not a haven for recalcitrant debtors and those who would seek to evade justice.”
Owen Prew: Overall the BVI is a very pro-creditor jurisdiction in terms of the willingness of the BVI Commercial Court to assist with the enforcement of foreign judgment debts where there are assets located within the jurisdiction. While it is hard to anticipate further legislative changes, the Charging Orders Act 2020 ensured that the jurisdiction remains competitive for internal business going forward.
Tim Prudhoe: It is a difficult balance to strike. Legislative change in the “big three” (Cayman, BVI and Bermuda) is often driven by competition between them and external pressures will continue the march towards open registers in terms of beneficial ownership.
Christopher Smith: Notwithstanding this creditor friendly perception, the BVI Court has previously also shown a willingness to support a more debtor friendly approach in certain circumstances. In the Constellation, Ltd. decision, the BVI Commercial Court appointed the first ever soft touch provisional liquidators over a number of BVI companies in connection with a group restructuring taking place in Brazil. While it is unlikely there will be any fundamental shift in the perception of the BVI as a creditor friendly jurisdiction in the short term, it’s important to note that there is a balance.
Matthew Brown is Counsel in the Litigation & Restructuring Department of Conyers Dill & Pearman in the BVI and has a broad practice covering all contentious aspects of commercial, trusts and insolvency law. Since joining Conyers in 2017, he has been involved in some of the jurisdiction’s leading cases and has appeared in a number of cases in the Commercial Court and Court of Appeal.
Laura Hatfield is the head of the Litigation and Insolvency & Restructuring groups in the Cayman Islands and Partner at Bedell Cristin. She has advised bankruptcy and restructuring professionals, lenders, investors and professional service providers in the Cayman Islands, UAE and Europe and has been involved in most of the significant Cayman Island cases in the last decade, including Bear Stearns and Weavering.
Jonathon Milne is a Partner in the Litigation department in the Cayman Islands office of Conyers Dill & Pearman and has extensive experience of complex litigation and insolvency matters. He focuses on financial services, litigation and insolvency/restructuring, acting for investment managers, directors, service providers, liquidators and receivers.
John O’ Driscoll leads the Insolvency and Dispute Resolution (IDR) team at Walkers in London and practices BVI and Cayman law. He specializes in contentious and non-contentious insolvency work and international disputes, and advises creditors, debtors, private equity and hedge funds and other stakeholders.
Owen Prew is a Senior Associate at Bedell Cristin. He is an English and BVI qualified solicitor advocate specializing in Commercial and Insolvency litigation. He has substantial offshore experience acting for and advising clients in respect of high-value commercial matters involving shareholder disputes, director’s breach of duty claims, enforcement of judgments and all forms of insolvency proceedings and remedies.
Tim Prudhoe is an English Barrister and practices both across the Caribbean from a Turks and Caicos Islands base as well from 3 Hare Court, London. A former Big Law lawyer, he brings commercial acumen to cross-border litigation strategies. He is often offshore counsel to disputes run from onshore involving litigation funding issues.
Christopher Smith is a Director of R&H Restructuring (Cayman) with more than 25 years of experience in corporate restructuring and insolvency. He is a UK-qualified and licensed insolvency practitioner and an insolvency practitioner in the Cayman Islands. He has been involved in a wide variety of restructuring and liquidation assignments, from advising stakeholders and investors in distressed situations, to acting as Official Liquidator appointed by the Grand Court of the Cayman Islands.
Daniel Hall is the Managing Director and co-lead of Burford’s global corporate intelligence, asset tracing and enforcement business. He previously spent ten years investigating fraud and financial crime and was a co-founder of Focus Intelligence Ltd, a leading asset recovery advisory boutique acquired by Burford in 2015.
Michael Redman is the Managing Director and co-lead of Burford’s global corporate intelligence, asset tracing and enforcement business. He has worked in complex asset recovery and enforcement, holding senior positions in both Moscow and London before co-founding Focus Intelligence Ltd.