Bank Insolvency, Trusts and Depositor Protection in the Cayman Islands
20 Nov 2015
The Grand Court of the Cayman Islands has held that depositor protection provisions in Cayman Islands law only apply in respect of depositors with deposits of CI$20,000 (US$24,400) or less.1 Depositors with more than CI$20,000 on deposit do not benefit from such provisions at all, even for their first CI$20,000. This means that, for persuasive policy reasons, the position in the Cayman Islands differs from the position in the EU under the deposit guarantee scheme. Under the deposit guarantee scheme all depositors receive a certain amount of protection, irrespective of the total amount on deposit.
Clear guidance was also provided by the Grand Court on the rules to be applied in determining the ownership of funds transferred to a bank at or around the time of the suspension of the bank's operations. This guidance does not turn on any Cayman Islands specific legislation and so may also be persuasive in other common law jurisdictions.
Caledonian Bank Ltd ("Caledonian") received a large number of payments for the credit of the account of a number of Caledonian's depositors at or around the time of the suspension of all of Caledonian's operations (the "Suspension"). Following the Suspension a winding-up order was made in respect of Caledonian.
Caledonian's joint official liquidators sought the directions of the Cayman Islands Grand Court as to whether these payments were beneficially owned by Caledonian or held on trust for the originator of the payment. Directions were also sought in relation to the interpretation of the preferential debt provisions in Cayman Islands law relating to bank depositors (the "Depositor Protection Provisions").
The general rule is that an intended payment between the originator of the transfer and the beneficiary is complete when the beneficiary's bank: (i) receives directly (or indirectly through a correspondent bank) payment instructions from the originator's bank and decides to make an unconditional credit to the beneficiary's account in the equivalent amount; and (ii) has the beneficiary's actual or ostensible authority to accept the transfer on the beneficiary's behalf.
A constructive trust will arise by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property to assert his own beneficial interest in the property and deny the beneficial interest of another. Therefore where money is paid to someone by mistake and the recipient knows of the mistake, but retains the money, the recipient will be a constructive trustee of the money for the payer. The trust arises from the date that the recipient became aware of the mistake and there is no need for there to have been some dishonesty or theft on the part of the recipient. Where a company receives funds after it has decided to cease trading (as was the case with Caledonian after the Suspension) such payments are held by the company as constructive trustee from the moment that the funds had been received (or accepted).2
Ownership of payments
Monies received by Caledonian before the Suspension and credited automatically to the Caledonian depositor's account belonged beneficially to Caledonian. Caledonian had the authority of each of its customers to accept money wired to it for the account of its customers. The fact that the relevant sum had been automatically credited to the customer's account before the Suspension constituted an unconditional acceptance of the money by Caledonian so completing its transfer both in law and equity.
Monies received before the Suspension, but which were never credited to the Caledonian depositor's account, were held on constructive trust by Caledonian for the relevant originator. This was because such payments had not been formally completed as there had been no decision by Caledonian to make an unconditional credit to the beneficiary's account.
Monies received after the Suspension belonged beneficially to the relevant originator irrespective of whether or not they were credited to the customer's account. A constructive trust was imposed in respect of those monies in favour of the relevant originator. Either Caledonian had no authority to receive payments on behalf of its customers or it must have been obvious to Caledonian that such payments were made by mistake (as it was inconceivable that an originator would have made the payment if it had been aware of the Suspension).
The decision of the Grand Court represents a useful application of established principles in the realm of bank insolvency. Banks which become subject to a suspension of operations and then potentially formal insolvency proceedings will receive a large number of transfers for the credit of depositors. The clear guidance from the Grand Court as to how the standard rules apply in this context will be useful, not just to Cayman Islands bank insolvencies, but potentially to bank insolvencies in other common law jurisdictions.
Depositor protection – preferential debts
It was only depositors with deposits of CI$20,000 or less who benefitted from the Depositor Protection Provisions (i.e. those depositors whose total deposit was CI$20,000 or less were preferential creditors for the value of their deposit – those depositors with more than CI$20,000 on deposit were not preferential creditors for any amount).
The decision turned on the wording of particular provisions of the Companies Law (2013 Revision), which provide that preferred creditor claims include "Any sum due to eligible depositors who have deposits with a company…and which does not exceed the deposit limit." The deposit limit is set at "twenty thousand dollars in respect of each eligible depositor…". It was held that the words "and which does not exceed the deposit limit" meant a limit referable to the total amount of a depositor's deposit(s). The provisions therefore sought to isolate certain depositors whose claims in the liquidation total CI$20,000 or less from those whose claims in the liquidation exceed CI$20,000. On one view, this might be seen as a curious result. Depending on the dividends ultimately paid, a depositor with a balance of CI$19,000 may recover more than a depositor with a balance of CI$21,000. However, the legislation was interpreted as being intended to protect small investors, rather than providing a blanket protection up to a certain level for all depositors. Further, the early payout of small depositors would ease the administration of the estate by reducing the number of constituents resulting in overall economies of scale for the entire liquidation.
1 In the matter of Caledonian Bank Limited (in official liquidation), Grand Court of the Cayman Islands Financial Services Division, Smellie CJ, 23 July 2015, FSD 27 of 2015 (ASCJ)
2 Re Farepak Food and Gifts Ltd  EWHC 3272 (Ch)
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