This article first appeared in Volume 20, Issue 1 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing - www.chasecambria.com.
Synopsis
In the recent judgment of Re Premier Assurance Group SPC Ltd. (in Official Liquidation) (unreported, Smellie C.J., Cause No. FSD 264 of 2020 (ASCJ), 7 April 2022), the Grand Court of the Cayman Islands sanctioned a decision by the joint official liquidators (‘JOLs’)1 of Premier Assurance Group SPC Ltd (in Official Liquidation) (the ‘Company’) to return (or procure the return of) certain payments held by or on behalf of the Company referable to one of its segregated portfolios, Premier Assurance Segregated Portfolio (‘PASP’), to the respective payers on the basis that such sums were paid by mistake.
In that case, the Grand Court provided helpful guidance of the principles on which a constructive trust may be imposed in respect of payments made by mistake, which will be of fundamental importance in the context of insolvency where there are competing claims to money between the general body of creditors of an insolvent company and a person making a proprietary claim over the money. This article provides an overview of that decision and, in particular, a summary of factors to consider where payments are made to a company by mistake after the commencement of its liquidation.
The winding up of the Company
The Company was registered as an exempted segregated portfolio company in the Cayman Islands and was previously issued with an unrestricted Class ‘B’ Insurer’s Licence. Unit-linked life insurance products were offered through PASP globally (with the exception of the United States) and sold to markets in the Latin American, Caribbean (except the Cayman Islands), European and Asian regions.
The key events leading to the winding up of the Company were as follows:
(a) On 14 September 2020, the Cayman Islands Monetary Authority (‘CIMA’) exercised its powers under the Insurance Act, 2010 to appoint joint controllers (‘Joint Controllers’) to assume control over the affairs of the Company.
(b) FollIn the instant case, the JOLs sought sanction pursuant to Section 110(2)(a) of the Companies Act thatowing the recommendations of the Joint Controllers, CIMA presented a winding up petition in respect of the Company on 26 October 2020 (the ‘Winding Up Petition’). As explained in further detail below, the JOLs’ sanction application to the Grand Court concerned mistaken premium payments received by or on behalf of the Company referable to PASP after this date.
(c) On 27 October 2020, the Grand Court appointed the Joint Controllers as joint provisional liquidators (‘JPLs’) of the Company pursuant to section 104(3) of the Companies Act (2022 Revision) (‘Companies Act’) to enable the JPLs to properly investigate the terms of a potential proposal and to explore any viable options to sell the insurance business of PASP to third parties. Ultimately, however, no offers were received and the JPLs recommended that CIMA proceed with the Winding Up Petition.
(d) On 19 April 2021, the Grand Court made a Winding Up Order against the Company and appointed the JPLs as JOLs. Shortly thereafter, CIMA revoked the Company’s Class ‘B’ Insurer’s Licence effective on 19 April 2021.
The Mistaken Payments
During the course of their investigations, the JOLs identified that a number of premium payments held by or on behalf of the Company referable to PASP had been received from participants who hold or held insurance policies referable to PASP (the ‘Participants’) after the commencement of the winding up on 26 October 2020 (i.e. the date of the presentation of the Winding Up Petition) (referred to as the ‘Mistaken Payments’). Generally, those erroneous payments were made due to automated bank transfers (direct debit) or charges on a credit card.
There were two main categories of Mistaken Payments:
(a) Firstly, premium payments totalling over USD 500 000 were paid directly into two bank accounts in the name of the Company referable to PASP and under the control of the JOLs between 27 October 2020 and 30 November 2021.
(b) Secondly, premium payments received by Lyncpay LLC (‘Lyncpay’) pursuant to a service agreement between the Company and Lyncpay dated 30 July 2015 (‘Service Agreement’) in which Lyncpay was obliged (among other matters) to collect premiums and process payments in accordance with the terms of that agreement. Importantly, the Service Agreement provided that all insurance monies collected by Lyncpay on behalf of the Company would be held by Lyncpay in a fiduciary capacity. On the basis of the JOLs’ review of documentation which had been provided by Lyncpay to the JOLs, the JOLs understood that thousands of individual Mistaken Payments had been received by Lyncpay during the period between 27 October 2020 and 30 April 2021.
The issue facing the JOLs was how these Mistaken Payments should be treated and, in particular, whether such payments should be returned to the respective payers or available as part of the insolvent estate of the Company (referable to PASP) for distribution on a pari passu basis amongst the Company’s unsecured creditors.
The JOLs’ application
Under Cayman Islands law, liquidators may make an application to the Grand Court pursuant to Section 110(2) of the Companies Act for an order sanctioning the exercise or proposed exercise of any power conferred upon them by Part I of the Third Schedule of the Companies Act or otherwise. One of the powers set out in Part I of the Third Schedule includes the ‘power to deal with all questions in any way relating to or affecting the assets or the winding up of the company’.
In the instant case, the JOLs sought sanction pursuant to Section 110(2)(a) of the Companies Act that they be authorised to exercise this power to return (or procure the return of) the Mistaken Payments held by or on behalf of the Company (referable to PASP) to their respective payers.
In summary, the JOLs submitted that these Mistaken Payments should be returned to the respective payers on the basis of the principle that money paid by mistake will be held on constructive trust for the payer if the circumstances render it unconscionable for the payee to retain the moneys as against the payer. The JOLs submitted that this will be the case if the money was paid by mistake and the payee – here the Company on behalf of PASP – was or should have been aware of the mistake when it received the money.
Constructive trust where payment made by mistake
Generally, a constructive trust may be imposed by 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’. There are a number of circumstances in which a constructive trust may arise by operation of law (such as, for example, those arising from some pre-existing fiduciary relationship), which are outside the scope of this article. In Re Premier Assurance Group, the Grand Court was concerned with constructive trusts that arise where there is no prior fiduciary relationship. In such cases, a constructive trust giving rise to a proprietary claim (as opposed to a merely personal one) may be imposed on property obtained by theft, fraud or mistake.
In Angove’s Pty Ltd v Bailey [2016] UKSC 47; [2016] 1 W.L.R., Lord Sumption stated at [30] that in cases where money is paid with the intention of transferring the entire beneficial interest to the payee (which was assumed was the mistaken intention of the payers of the Mistaken Payments in respect of meeting their premium obligations), the least that must be shown in order to establish a constructive trust is:
(a) that that intention was vitiated, for example because the money was paid as a result of a fundamental mistake or pursuant to a contract which has been rescinded; or
(b) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party.
The question for the Grand Court in Re Premier Assurance Group rested on the former limb of Lord Sumption’s formulation.
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. A payment made by mistake may be of fact or law and arises from the date that the recipient became aware of the mistake. As to the requirement that the recipient of a payment knows of the mistake, the House of Lords considered in the English case of Westdeutsche Landesbank Girozentrale v Islington LBC [1996] A.C. 669 that a recipient of money will not be a constructive trustee for so long as he is ignorant of the mistake. In that case, Lord Browne-Wilkinson commented as follows:
(a) At page 705D: ‘Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience.’
(b) At page 715B on when a constructive trust might arise where a payment had been made by mistake: ‘Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust…’
A constructive trust arises when the conscience of the recipient has been affected. This does not require that there has been some dishonesty or theft practised by the defendant, but only that there be some treatment by the defendant of property in which the plaintiff has rights which treatment is considered to be unethical in a broad sense. The following authorities from other jurisdictions are also illustrative of the position:
(a) the Australian case of Wambo Coal Pty Ltd v Ariff & 1 Or [2007] NSWSC 589 in which the Supreme Court of New South Wales held that moneys that had been paid by the plaintiff to the defendant company (in liquidation) in the mistaken belief that the plaintiff owed the defendant money were held on constructive trust by the defendant for the plaintiff from the time when the defendant became aware that they had been paid by mistake. White J
held at [43] that: ‘once the recipient is aware that, by a mistake, he has got something for nothing, a proprietary remedy is appropriate. The fact that the company is insolvent does not affect this conclusion. It would be an unwarranted windfall for the Company’s creditors to share in the payment…’
(b) the English case of Re Farepak Food and Gifts Ltd [2006] EWHC 3272 (Ch); [2008] BCC 22 involving the receipt by a company (Farepak) of payments by customers in connection with its Christmas savings scheme after the company had ceased to trade. The directors of Farepak decided to cease trading on 11 October 2006 and the company went into administration on 13 October 2006. Farepak’s administrators sought various directions as to whether they could distribute funds received from customers in the three days leading up to the administration to those customers. In respect of the argument that a constructive trust had been imposed in respect of these sums, Mann, J. stated
at [40] that: ‘if and in so far as it could be established that moneys were paid to Farepak by customers at a time when Farepak had decided that it had ceased trading, and indeed at a time when it had indicated that payments should not be received, then there is a strong argument for saying that those moneys would be held by the company as constructive trustee from the moment they were received.’
In the Cayman Islands, the issue of whether sums paid by mistake by depositors to an insolvent bank after that bank had suspended its operations arose in Re Caledonian Bank Limited (in Official Liquidation) [2015 (2) CILR [9]. In that case, the joint official liquidators of Caledonian Bank Limited (the ‘Bank’) sought the Grand Court’s authorisation to (inter alia) repay sums received by the bank from potential depositors during its liquidation. The Bank’s operations had been suspended by the Bank’s board of directors on 9 February 2015 following allegations of fraudulent trading. The Bank’s voluntary liquidation commenced on 10 February 2015 and a subsequent winding-up order was made by the Grand Court on 23 February 2015. The Bank received a number of deposit payments around the time of the suspension of its operations and its joint official liquidators sought authorisation from the Grand Court relating to the treatment of various categories of payments received before and after the suspensions.
Applying the above authorities, Smellie C.J concluded at [39] that in circumstances where a company receives funds after it has decided to cease trading (such as, by way of example, in the case of the Bank in Re Caledonian after the implementation of the suspension of its operations), it was settled principle that such payments are held by the company as constructive trustee from the moment that the funds are received (or accepted).
In respect of sums which had been received by the Bank after the suspension of operations, Smellie C.J. held at [45(c)] that such payments were held on constructive trust for the relevant originator who made the payment. This was on the basis that, following the suspension, the Bank no longer had authority to receive payments on behalf of its customers so it therefore could not have unconditionally accepted the money. Alternatively, it was or must have been obvious to the Bank that payments made after the suspension were made by mistake in that it is inconceivable that an originator would have made it had it been aware that the Bank had imposed the suspension. In those circumstances, it would be held to be unconscionable for the Bank to retain the moneys as against the originators.
Key findings of the judgment
During the course of his judgment in Re Premier Assurance Group, Smellie C.J. recognised that the question of whether a constructive trust may be imposed where a payment has been made by mistake will be of fundamental importance in the context of insolvency (as in the Company’s case). In such cases, the claim to the money will be as between the general body of creditors of the insolvent recipient and the person claiming to have a proprietary claim to such sums in priority to other creditors.
Applying the legal principles above to the Mistaken Payments, Smellie C.J. accepted the JOLs’ submission that premium payments received after the presentation of the Winding Up Petition are held by the Company (referable to PASP) as constructive trustee from the moment that the funds were received. The following matters were material to that decision:
(a) The JOLs’ sanction application related only to Mistaken Payments made after the commencement of the winding up of the Company on 26 October 2020;
(b) The Mistaken Payments generally represented direct debits due from the Company which had not been cancelled by Participants following the presentation of the Winding Up Petition;
(c) During the period in which the Company was in provisional liquidation (namely, 27 October 2020 and 19 April 2021), the JPLs had been appointed to investigate selling or transferring the business of PASP as an alternative to a winding up of the Company (rather than to permit the Company to actively continue trading);
(d) By analogy with Re Caledonian, the Mistaken Payments were paid by Participants following the presentation of the Winding Up Petition and after the Company’s operations had effectively been suspended given that no benefits were being paid to Participants who held policies with the Company referable to PASP; and
(e) In the circumstances, Smellie C.J. accepted that no benefit could have accrued to a Participant in respect of a Mistaken Payment, and the Company would have been fixed with this knowledge at the time of receipt of the payments.
Accordingly, Smellie C.J. held that a constructive trust had been imposed in respect of premium payments received by the Company referable to PASP (or on its behalf by Lyncpay in a fiduciary capacity) on or after the presentation of the Winding Up Petition on 26 October 2020 in favour of the relevant payer. Further or alternatively, as in Re Caledonian, Smellie C.J. held that it was or must have been obvious to the Company that premium payments made after the presentation of the Winding Up Petition were by fundamental mistake, in that it was inconceivable that a Participant would have made such payment had he or she been aware that a Winding Up Petition had been presented against the Company. In those circumstances, it would be unconscionable for the Company to retain the moneys (whether held by the Company or recovered by the JOLs from Lyncpay) as against the payers.
Comment
The judgment provides helpful clarification in respect of the principles underpinning the circumstances in which a constructive trust may be imposed where a payment has been made by mistake. As acknowledged by Smellie C.J., such issues will be crucial to determine the extent to which any persons hold proprietary claims over assets held by a company in the context of its insolvency.
Whilst the Grand Court held that it was or must have been obvious that the payments were a result of a fundamental mistake and the Company was fixed with the relevant knowledge at the time of their receipt, in other cases, there may be greater difficulties identifying the point of time at which the conscience of the recipient is affected giving rise to a constructive trust. By way of example, it may not always be readily apparent to a recipient that a payment has been made in error and a recipient may only become aware that there has been mistake much later than the date of receipt of such payment.
Given the potential significance of such proprietary claims, liquidators ought to consider at an early stage whether there are any potential mistaken payments. Whilst each case will turn on its own facts, ring-fencing any potential mistaken payments pending any determination from the Grand Court as to whether there is a constructive trust may avoid the risk of liquidators either inadvertently applying such funds to liquidation expenses or otherwise facing claims arising from allegations of breach of trust.
