IN THE MATTER OF BRISTOL FUND LIMITED 02-May-2008
[2008 CILR 317]
IN THE MATTER OF BRISTOL FUND LIMITED
IN THE MATTER OF BEACON HILL MASTER LIMITED
GRAND COURT (Smellie, C.J.): May 2nd, 2008
Companies—auditors—indemnity against liability—auditor may be treated as company “officer” for purpose of relying on indemnity provided in company’s articles, if contractual indemnities unavailable to it—officers may not indemnify themselves against losses resulting from own conduct, but may rely on indemnity for losses attributable to conduct of other parts of management
Companies—auditors—indemnity against liability—if contractual indemnity protects auditor from losses attributable to conduct of company’s management, auditor to show contributory causal connection between that conduct and its losses—company may be liable for cost of auditor’s successfully defending itself against company’s action for negligence
Companies—voluntary winding up—creditors—proof of debt—contingent loss admissible to proof as debt—“debt” includes any liability to which company might become subject after date of winding up, by reason of any obligation incurred before then—admissibility depends on whether fair estimate possible
    The applicant, Ernst & Young Cayman Islands (“EYCI”), submitted proofs of debt to the respondent liquidators in the liquidations of Bristol Fund Ltd. (“Bristol”) and Beacon Hill Master Ltd. (“BHM”), in respect of losses it had sustained in its capacity as their auditor.
    Bristol and BHM were Cayman mutual fund companies, which were part of a group of funds managed by a US fund manager, Beacon Hill Asset Management (“BHAM”). Other operational responsibilities of Bristol and BHM were contracted out to different service providers, including EYCI, as the funds’ auditor. Following proceedings against BHAM, Bristol and BHM in the United States, the funds eventually collapsed and were put into liquidation in the Cayman Islands. Certain investors and the respondents (on behalf of BHM) instituted proceedings, in separate actions, against EYCI, BHAM and another in the United States. Those actions centred on allegations that BHAM had fraudulently misrepresented the success and value of the funds, which had induced further investment, thereby causing loss to the investors upon the failure of the

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funds, which could itself be attributed to BHAM’s fraud, and that such fraud could not have succeeded without the reckless and negligent conduct of EYCI in conducting audits.
    While the liquidators’ action had not yet been resolved, EYCI’s defence to the investors’ action had been successful and all claims against it had been dismissed. EYCI therefore submitted proofs of debt to the respondents in respect of the costs it had incurred in defending the investors’ action, and those costs anticipated to be incurred by them in respect of the liquidators’ action, contingent on their successfully defending it. The respondents rejected those proofs of debt and EYCI appealed to the Grand Court in the present proceedings.
    The applicant submitted that the court should order the respondents to admit the proofs of debt and provide for them accordingly because (a) clauses in each of its engagement letters indemnified it against any losses suffered relating to the services it provided to the funds, where such losses were attributable to any fraudulent acts or omissions, misrepresentations or wilful default by “management and employees” of the funds; (b) BHAM was to be treated as part of the “management” of the funds, responsible for formulating and implementing their investment strategy, as provided for in the investment management agreements with the funds; (c) its losses were attributable to the fraudulent conduct of BHAM—it only had to demonstrate a contributory causal connection between the conduct of BHAM, as “management,” and its losses, which it had clearly done as, if BHAM had not so conducted itself, it would never have been implicated and sued; (d) the respondents were estopped from (i) denying that BHAM was part of the “management” of the funds; and (ii) relying on the fact that no court had actually found BHAM guilty of the alleged fraud, in order to prevent EYCI from itself relying on the indemnity clauses, because the respondents had alleged fraudulent “mismanagement” against BHAM and it would be unjust to allow them to resile from that representation; (e) the respondents could not deny liability to indemnify them against their losses on the basis that they were attributable to EYCI’s own negligence, as the losses themselves arose, and would arise, as a result of EYCI’s successful defence of allegations of that negligence; (f) the respondents should make provision for both its actual and anticipated losses, contingent on successfully defending the respondents’ US action against them, as such losses were a liability admissible to proof, as they represented a “debt” within the meaning of both r.13.12(1)(b) of the English Insolvency Rules 1986 and s.161 of the Companies Law (2004 Revision), albeit payable on a contingency, as they were liabilities to which the funds became subject, after the date of their winding up, by reason of their obligation undertaken before that date, i.e. to indemnify EYCI against any losses resulting from the conduct of its management; and (g) it was entitled to be regarded as an “officer” of the funds, for the purposes of their articles of association, which indemnified such officers against costs, including legal costs, incurred by reason of any contract entered into, or act, or thing done by them in the discharge of their duties, as was the case here; in the absence

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of legislation governing the status of auditors as officers, the question turned on the construction of the funds’ articles, which did not preclude EYCI from being treated as “officers.”
    The respondents submitted in reply that they were not liable to indemnify the applicant in respect of their legal costs because (a) BHAM was not to be treated as part of the “management” for the purposes of the indemnity clauses in the applicant’s engagement letters; (b) in any case, no court had yet held that BHAM had, in fact, committed any fraudulent acts or omissions, misrepresentations or wilful default; (c) even if such fraud could be established, the applicant’s losses were not attributable to it, but resulted from its own negligence; (d) they were certainly not liable for EYCI’s anticipated losses, contingent on it successfully defending their own US action against it, as such loss was not a liability, or “debt,” that could be admissible to proof, not being justly calculable; and (e) the applicant was not to be treated as an officer of the funds, being merely an independent contracted auditor, and to do so would cause conflict, in that it would make EYCI part of the management of the funds, and by reliance on the indemnities in the articles, they would be indemnified against liability arising from their own wilful default (as alleged against BHAM); therefore, it could not rely on the indemnity clauses in the funds’ articles of association.
    Held, allowing the appeal:
    (1) The respondents would be ordered to accept the applicant’s proofs of debt and provide for them accordingly. EYCI’s losses in respect of defending the actions of the investors and liquidators, both actual and contingent, were attributable to the conduct of BHAM. BHAM was to be treated as the “management” of the funds for the purposes of the indemnity clauses in the letters of engagements between the funds and EYCI, and the respondents were therefore liable to indemnify EYCI in respect of those losses. BHAM was an integral part of the management of the funds, responsible for formulating and implementing their investment strategy, as provided for in the investment management agreements between BHAM and the funds. It was also clear from the funds’ articles of association that, for their purposes, the investment manager was to be treated as “management” (para. 25; para. 31; para. 33; para. 86).
    (2) The respondents themselves, in their action against BHAM and EYCI, alleged that the funds’ losses were attributable to the “mismanagement” of BHAM, in its role as fund manager, and they were therefore estopped from denying that BHAM was part of the funds’ management. Similarly, the respondents, having alleged fraudulent conduct against BHAM, were also estopped from relying on the fact that no court had actually pronounced and confirmed that fraud, in order to defeat EYCI’s claims pursuant to the indemnity clauses. It was a basic principle of equity and fairness that a litigant could not gain an unfair advantage by adopting inconsistent positions in different proceedings; a party that led another to believe in a particular state of affairs would not be allowed to resile from

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that representation when it would be unjust to allow it to do so, the court having regard to considerations of prejudice and the balance of justice (paras. 35–36; para. 38; paras. 40–41).
    (3) It being established that BHAM, as management, was guilty of fraudulent conduct, it could also be held that EYCI’s losses were attributable to that conduct, and not to its own alleged negligence. EYCI only had to demonstrate that there was a more than insignificant contributory causal connection between the conduct of BHAM, as “management,” and its losses, which it had clearly done. As EYCI’s claims were predicated upon its having successfully defended the US actions, in which case any allegations of its own negligence would be dismissed (as they had been in respect of the investors’ action), the respondents could not therefore claim that those losses (the costs of defence) were attributable to EYCI’s own negligence (paras. 45–47).
    (4) The respondents were liable to pay both EYCI’s actual losses, in respect of the investors’ action, and its anticipated losses, contingent on successfully defending the respondents’ own action against them, a liability which was admissible to proof. Whether or not a contingent, anticipated, claim was admissible to proof did not depend merely on whether or not a just estimate of it could be made; if the debt existed, albeit payable on a contingency, it was admissible to proof, and the question then became whether or not it could be fairly estimated. The funds incurred (by way of the letters of engagement) an obligation to indemnify EYCI in respect of liabilities to which EYCI might, in the future, become subject, in accordance with r.13.12(1)(b) of the English Insolvency Rules 1986, which explained that “debt,” for the purposes of s.161 of the Companies Law (2004 Revision), included any debt or liability to which a company might become subject after the date of winding up, by reason of any obligation incurred before that date (here, being the obligation of the funds to indemnify EYCI against any losses resulting from the conduct of its management). However, in making the estimate of such provision, the respondents need not consider damages in respect of which EYCI might become liable based on EYCI’s own fraudulent conduct (as it was not legally possible to give an indemnity so wide as to exclude liability for fraud, dishonesty, or wilful default on the part of officers who owe a fiduciary obligation to a company), but only the losses incurred by EYCI in defending the allegations of negligence made against it (para. 55; paras. 57–59; paras. 70–71).
    (5) In any case, if the contractual indemnities were found, on appeal, to be unavailable to EYCI, it could also rely on the indemnity protection afforded to it by the funds’ articles of association, as it was to be regarded as an “officer” of the funds for the purposes of the indemnity clauses therein. The question of whether it was an officer of the funds turned on the construction of the funds’ articles of association, and nothing in them, or in the letters of engagement between EYCI and the funds, precluded EYCI from being treated as officers. There was no risk of conflict, if EYCI claimed indemnity

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in respect of losses attributed to the fraudulent conduct of the management, EYCI itself being part of that management if regarded as an officer, as all officers of a company owed a fiduciary duty of care to act in good faith, which precluded them from claiming indemnity against loss resulting from their own fraud, dishonesty, wilful neglect or wilful default, and this was both expressly and impliedly provided for within the funds’ articles (para. 73; para. 75; para. 77; para. 85).
Cases cited:
  (1)    Armitage v. Nurse, [1998] Ch. 241; [1997] 3 W.L.R. 1046; [1997] 2 All E.R. 705; [1997] Pens. L.R. 51; (1997), 74 P. & C.R. D13, referred to.
  (2)    Barings PLC v. Coopers & Lybrand (No. 7), [2003] Lloyd’s Rep. I.R. 566; [2003] P.N.L.R. 34; [2003] EWHC 1319 (Ch), referred to.
  (3)    Brazilian Rubber Plantations & Estates Ltd., In re, [1911] 1 Ch. 425; (1911), 80 L.J. Ch. 221; 103 L.T. 697; 27 T.L.R. 109, referred to.
  (4)    City Equitable Fire Ins. Co. Ltd., In re, [1925] Ch. 407; [1924] All E.R. Rep. 485; [1925] B. & C.R. 109; (1925), 94 L.J. Ch. 445; 133 L.T. 520; 40 T.L.R. 853, considered.
  (5)    Express Newspapers PLC v. News (U.K.) Ltd., [1990] 1 W.L.R. 1320; [1990] 3 All E.R. 376; [1991] F.S.R. 36, referred to.
  (6)    Fleming v. Wandsworth London B.C. (1984), 83 L.G.R. 277; 11 A.L.J. 272, followed.
  (7)    Grundt v. Great Boulder Pty. Gold Mines Ltd. (1937), 59 C.L.R. 641, dictum of Dixon, J., referred to.
  (8)    Hardy v. Fothergill, [1886–90] All E.R. Rep. 597; (1888), 13 App. Cas. 351; 58 L.J.Q.B. 44; 59 L.T. 273; 4 T.L.R. 603, applied.
  (9)    Kingston Cotton Mill Co., Re, [1896] 1 Ch. 6; (1896), 65 L.J. Ch. 145; 73 L.T. 482; 12 T.L.R. 60, dictum of Williams, J., followed.
(11)    Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548; [1991] 3 W.L.R. 10; [1992] 4 All E.R. 512, dictum of Lord Bridge, followed.
(12)    London & General Bank, Re, [1895] 2 Ch. 166; [1895–99] All E.R. Rep. 948; (1895), 64 L.J. Ch. 866; 39 Sol. Jo. 450; 72 L.T. 611; 11 T.L.R. 374, considered.
(13)    Mallett v. Restormel B.C., [1978] 2 All E.R. 1057; [1978] I.C.R. 725; (1978), 13 I.T.R. 246; 77 L.G.R. 1; 122 Sol. Jo. 178, dictum of Donaldson, J., referred to.
(14)    Midland Coal Coke & Iron Co., Re, [1895] 1 Ch. 267; (1895), 64 LJ Ch. 279; 39 Sol. Jo. 112; 71 L.T. 705; 11 T.L.R. 100, followed.
(15)    Moorgate Mercantile Co. Ltd. v. Twitchings, [1976] Q.B. 225; [1975] 3 W.L.R. 286; [1975] 3 All E.R. 314; [1975] R.T.R. 528; (1975), 119 Sol. Jo. 559, dictum of Lord Denning, M.R., followed.
(16)    Mutual Reins. Co. Ltd. v. Peat Marwick Mitchell & Co., [1997] 1 Lloyd’s Rep. 253; [1997] 1 BCLC 1; [1996] BCC 1010; [1997] P.N.L.R. 75, followed.

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(18)    R. v. Shacter, [1960] 2 Q.B. 252; [1960] 2 W.L.R. 258; [1960] 1 All E.R. 61; (1960), 44 Cr. App. R. 42, referred to.
(19)    T & N Ltd., Re, [2006] 1 W.L.R. 1728; [2006] 3 All E.R. 697; [2006] 2 BCLC 374; [2006] B.P.I.R. 532; [2005] EWHC 2870 (Ch), applied.
(21)    Winter v. Inland Rev. Commrs., [1963] A.C. 235; [1961] 3 W.L.R. 1062; [1961] 3 All E.R. 855; [1961] T.R. 349; (1961), 40 A.T.C. 361; 105 Sol. Jo. 929, dictum of Lord Reid followed.
Legislation construed:
Companies Law (2004 Revision), s.161: The relevant terms of this section are set out at para. 54.
Insolvency Rules 1986 (S.I. 1986/1952), r.13.12: The relevant terms of this rule are set out at para. 58.
A. Jones, Q.C. and B. Mays for the applicant;
Miss L. Hatfield for the respondent.
1 SMELLIE, C.J.: Bristol Fund Ltd. (“Bristol”) and Beacon Hill Master Ltd. (“BHM”) are mutual fund companies, incorporated in the Cayman Islands, but now in official liquidation. Ernst & Young Cayman Islands (“EYCI”) were their auditors. EYCI submitted proofs of debt in both liquidations, by reliance on indemnities for loss, to which EYCI claims to be entitled in its capacity as auditor of the funds. The proofs of debt have been entirely rejected by the liquidators, and this is EYCI’s appeal. On the July 13th, 2006, I gave judgment allowing the appeal, with written reasons to follow. These, rendered belatedly because of the unremitting exigencies of business in this court, are those reasons.
Background
2 The funds form part of a group of funds managed as a “master/feeder” structure, with Bristol being one of the vehicles used (along with two other US-based feeder funds) for receiving the investments of underlying participant investors, and then “feeding” those investments on to BHM (the master fund). BHM conducted all principal investment trading. Beacon Hill Asset Management LLC (“BHAM”), a New Jersey-based fund manger, was responsible, on all accounts, for the investment management of the master/feeder structure; although one of the central issues in dispute before me is whether BHAM was part of the “management” of Bristol and BHM.
3 Following an investigation by the Securities & Exchange Commission (“the SEC”) in the United States, the SEC, in 2002, filed a case against

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BHAM in the US District Court for the Southern District of New York (“the US court”). Bristol, BHM and the two other feeder funds (“Safe Harbour” and “Milestone”) were also named as defendants in that case. The US court then ordered that control of all fund assets be transferred to a new fund manager, prohibiting any redemption from the funds and any payments, other than in the ordinary course of business, without the prior approval of the US court. This has been an effective restraint, because the assets are mainly physically located in, and were managed from, the United States. That state of affairs led to the inevitable appointment, in the Cayman Islands, first, of the provisional liquidator and, thereafter, the official liquidators of Bristol and BHM.
4 Mr. Theo Bullmore of KPMG in the Cayman Islands and Mr. Phillip Stenger of Stenger & Stenger PC in Michigan were appointed as official liquidators of BHM, and Mr. Theo Bullmore as official liquidator of Bristol, by this court on January 30th, 2004 (together referred to as “the liquidators” and are the respondents in these current proceedings).
5 While one of the issues in dispute involves the nature of the management of the funds, it is common ground, nonetheless, that the operational responsibilities prior to their liquidations were contracted out to a number of professional service providers. The determination of net asset value is a function specifically delegated to the investment manager in the articles, subject to the overall supervision of the directors, as at each valuation date and on such other occasions as the directors may direct. BHAM was also responsible for formulating and implementing the investment strategy of the funds. This included, of course, the constant tracking and calculations of the value of the assets of the funds. The administrator was ATC Fund Services (Cayman) Ltd. (“ATC”), which was responsible for processing subscriptions and redemptions, preparing financial statements, and publishing the net asset value (“NAV”) calculated figures.
6 As with most Cayman mutual funds, organized as companies rather than as limited partnerships, the funds had independent boards of directors, which had high level supervisory roles. Just what that involved is one of the collateral issues taken up before me now, in resolving the dispute over the nature of the role of the “management” of the funds. It is, however, also common ground that the funds, as is almost invariably the case with Cayman-domiciled mutual funds whose services are contracted out, had no employees of their own. Following the collapse of the funds, a spate of litigation ensued. Three separate lawsuits were filed by different groups of investors in the US court, which, for present purposes, I will describe together as “the investor actions.”
7 EYCI, as the former auditor of the funds, is a named defendant to the investor actions, along with BHAM and its individual principals: Messrs. John D. Barry, Thomas Daniels, John Irwin and Mark Miszkiewicz

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(hereinafter “the principals,” and when referred to together with BHAM, “the BHAM defendants”) as well as ATC. The liquidators also filed a lawsuit (“the liquidators’ action”) on behalf of BHM in the Supreme Court of the State of New York, against EYCI, Ernst & Young LLP (“EY”), ATC and the BHAM defendants.
8 The causes of action in the liquidators’ action and the investor actions are broadly related. Importantly, for present purposes, they all centre on allegations of fraud against the BHAM defendants. A synopsis of this aspect of the pleadings, which can be taken as common to all the investor actions, is as follows (taken from one of the amended complaints):
“From 1997, until the fall of 2002, BHAM was purportedly one of the largest hedge fund managers investing in mortgage-backed securities. In addition, BHAM held the funds out as two of the most successful hedge funds, reporting positive returns for the funds in virtually every month of their existence.
On October 8th, 2002, BHAM shocked the funds’ investors, by disclosing that the NAVs of the Funds had declined by 25%, from the NAVs reported as of August 31st, 2002. On October 17th, 2002, BHAM announced to the investors that the value of the funds had actually declined by 54%, from the NAVs reported as of August 31st, 2002. On November 27th, 2002, BHAM disclosed that the NAVs of the funds had actually declined by 61.22%, from those values reported as of August 31st, 2002.
Simply stated, the BHAM defendants perpetrated a classic hedge fund valuation fraud. From at least March 2000, through the collapse of the funds in the fall of 2002, the BHAM defendants provided investors, and prospective investors, with monthly performance reports stating that the funds’ NAVs were steadily increasing, with little volatility and virtually no negative months. These representations were false when made. In fact, the funds were losing money during this period. Those losses were exacerbated in the summer of 2002, after BHAM accumulated for the funds a significant short position in US treasuries, on a highly leveraged basis—apparently betting on an increase in interest rates. When interest rates continued to fall, the value of the funds’ portfolio continued to drop. None of this was disclosed to the plaintiffs.
The BHAM defendants represented that the funds’ securities would be valued at market rates, in good faith, by the funds’ managers, using independent broker marks, and, in certain discreet and limited circumstances, proprietary models. Instead, among other things, the BHAM defendants ignored the marks provided by its prime broker, Bear Stearns & Co., and improperly inflated the performance of the funds.

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Further, each of the plaintiffs was induced to invest in the funds, and to pay inflated prices for shares in the funds, by the persistently overstated valuation to the funds’ portfolios, and thereafter, the BHAM defendants intentionally caused the plaintiffs to maintain their investments in the funds, by continuing to lie about their performance. The plaintiffs’ losses were thus caused by the inflated valuations, disseminated by the BHAM defendants, as the failure of the funds after the true NAVs were disclosed was a foreseeable consequence of the fraudulent misrepresentations.”
9 As to the pleaded claim against EY, EYCI and ATC, the allegation was that the fraud could not have succeeded without their “reckless and negligent conduct” (in the case of EYCI, as the funds’ auditors in the Cayman Islands, and, in the case of ATC, as the funds’ administrator, directly disseminating false monthly NAV statements to the investors).
10 More specifically, as against EYCI, it was alleged that they recklessly and negligently ratified and confirmed the false valuations in annual audit reports, and that the plaintiffs (the investors) received and relied upon those reports and the audited financial statements in making and retaining their investments. Those audit reports represented that the audits had been conducted in accordance with the generally accepted auditing standards applicable in the United States, when, in fact, the allegations were that they had not.
11 As to the liquidators’ action, I need, for present purposes, focus only on the allegations as against EYCI, although they are tangentially relevant, in principle, also to the liquidators’ rejection, for similar reasons, of the proof of debt filed by ATC, based on indemnities claimed by ATC in its administrator’s engagement contract. Here, I take the relevant excerpts from the complaint filed in the liquidators’ action:
“Defendants EYCI and EY, sister accounting firms of the Ernst & Young international organization, performed the first, and only, audit on the master fund [BHM], covering the period from BHM’s inception on January 2nd, 2002, through March 31st, 2002. Although the report of independent auditors indicated that the audit was conducted in accordance with generally accepted auditing standards, it plainly was not. Among other auditing errors, EYCI and EY failed to take even the most basic steps to verify the method used by BHAM to value BHM’s investments. Had EYCI and EY made the appropriate investigation, they would have discovered that BHAM was fraudulently valuing BHM’s investments in a manner that hid the true value of those securities. This fundamental auditing error—relating, directly, to the most critical element of an investment fund audit (i.e. valuation)—permitted the inclusion of material errors in BHM’s financial statements regarding the valuation of its investments. As a

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result, the audited financial statements were not, as they purported to be, in conformity with generally accepted accounting principles. To the contrary, the financial statements, which the auditors certified as accurate, substantially overstated the value of BHM’s net assets per share, and reported substantial profits, instead of what were actually losses.
. . .
The deficient audit failed to alert the BHM directors to BHAM’s fraudulent valuation of BHM’s portfolio. Had such disclosure been made to the directors during the course of the audit, the directors would have terminated BHM, thereby avoiding further losses resulting from BHAM’s conduct, including the massive trading losses suffered by BHM in the summer of 2002. Instead, it was not until nearly six months later, when BHM learned of BHAM’s improper valuation of BHM’s portfolio, and when the SEC stepped in, that BHAM was removed as BHM’s investment manager, and BHM’s haemorrhaging investment value halted.”
12 Thus, in essence, the allegations, stated generally, are that the BHAM defendants fraudulently misrepresented the value of the funds, causing massive losses to the investors, and in this they were facilitated by the negligent manner of the performance of their audit functions by EYCI (and EY).
The basis of EYCI’s proof of debt in the liquidations
13 EYCI’s defence of the investor actions has been successful and all of those claims have been dismissed, at first instance, as against EYCI. To the extent that the claims involved allegations of EYCI’s complicity in the BHAM defendants’ fraud, those allegations were specifically dismissed on the basis that they disclosed no reasonable cause of action. To the extent that, at the time of the matter coming before me, there was the possibility of an appeal by the investors, that mere possibility was not suggested by the liquidators to be any basis for forestalling the determination of this appeal by EYCI.
14 While the related allegations against EYCI in the liquidators’ action (brought, it seems for maximum effect, in New York rather than in this, the jurisdiction of domicile of the funds) are not yet resolved, EYCI also stoutly denies and defends against them. In fact, one aspect of the liquidators’ action as it relates to EYCI—allegedly aiding and abetting of the breach of fiduciary duty by the BHAM defendants—was dismissed on EYCI’s preliminary application on April 12th, 2006. EYCI expresses optimism that the rest of the liquidators’ action will be similarly dismissed in due course.

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15 EYCI’s proofs of debt are presented by reference to the losses already actually incurred in respect of their costs of the investor actions (approximately US$900,000, “the actual losses”), and those losses anticipated to be incurred in respect of the liquidators’ action, along with any other losses arising from defending any further and related third party claims (“the contingent losses”).
16 EYCI puts its claims on the following legal basis. EYCI claims to be released and indemnified against any liability and costs it suffers “relating to the audit services it provided to the funds, where such losses are attributable to any fraudulent acts or omissions, misrepresentations or wilful default, by management and employees” of the funds. Each of the audit engagement letters, as between EYCI and Bristol, and EYCI and BHM, respectively, contains a release and indemnity clause in exactly those terms.
17 EYCI also claims to be entitled to be regarded as an officer of the funds, for the purposes of their articles of association, and, as such, to be entitled to the protection provided to officers by the indemnities included in the articles. BHM’s articles provide an indemnity in these terms:
“Every . . . officer or servant, of the company shall be indemnified by the company against . . . all costs, losses and expenses, which any such officer or servant, may incur, or become liable to (other than any loss, or expense, resulting from the wilful neglect, wilful default, fraud, or dishonesty of such person), by reason of any contract entered into, or act, or thing, done by him, as such officer or servant, or in any way in the discharge of his duties, including travelling expenses and legal costs incurred in defending any proceedings, whether civil or criminal, in which judgment is given in his favour, or in which he is acquitted . . .”
18 Bristol’s articles provide an indemnity in somewhat different terms:
“Every officer or servant of the company shall be indemnified by the company against . . . all costs, losses and expenses, which any such officer or servant may incur, or become liable to, by reason of any contract entered into, or act, or thing, done by him, as such officer or servant, or in any way in the discharge of his duties, including travelling expenses . . .”
19 By reference to the indemnity under the letters of engagement, EYCI says that its losses are “attributable” to the fraudulent acts, omissions, misrepresentations, or wilful default of the BHAM defendants, as the investment managers of the funds. It is also alleged that the BHAM defendants are, as such, a part of the management of the funds. The logic that would follow as to causation, is that had the BHAM defendants not so conducted themselves giving rise to the causes of action, EYCI could not

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have been implicated, however innocently, by being also sued in respect of facilitating their fraudulent conduct. Further, EYCI says that the liquidators may not now properly seek to suggest other than that the BHAM defendants behaved fraudulently, because that is exactly what the liquidators themselves have pleaded in the liquidators’ action.
20 By reliance on their claimed position as officers under the articles, EYCI seek to recover their actual and contingent losses, or costs of defending the various actions, on the basis that they have been sued in respect of the discharge of their duties, and so (without there being any wilful default, wilful neglect, fraud or dishonesty on their part) are entitled to recover those costs, pursuant to the indemnities under the articles. EYCI argues that this is so, even when they are sued by the liquidators themselves, standing in the position of the funds. I have approached this matter on the basis that, while not expressly so stated in Bristol’s articles, it is implicit that, as in the case of the express position in BHM’s articles, the indemnity must be read as excluding wilful default, wilful neglect, fraud and dishonesty.
21 Thus, in summary, EYCI claims against the funds under its indemnities in respect of its actual costs of successfully defending against the investor actions. EYCI also have contingent claims in relation to the costs they have been incurring, and will continue to incur, in defending against the liquidators’ action (assuming that their defence will be successful), and further contingent claims in respect of potential costs and liabilities EYCI might yet face in other actions. The proofs of debt filed by EYCI, and rejected in their entirety by the liquidators, are in respect of those actual and contingent losses.
The liquidators’ reasons for rejecting EYCI’s claim
22 The liquidators’ reasons can be summarized as follows. As to EYCI’s claim under the indemnity in their letters of engagement, the liquidators assert that BHAM, as investment manager, is not to be treated as part of the management of the funds. They say “management,” for these purposes, comprises the boards of independent directors and no one else. Thus EYCI’s claim for losses attributable to the fraudulent acts, or omissions, misrepresentations or wilful default of the BHAM defendants, is not “attributable” to management and so not covered by the indemnities in the letters of engagement. It is also asserted that, in any event, there has, as yet, been no adjudication by a court that the BHAM defendants committed any acts of fraud, and so no basis for attribution of EYCI’s losses to the fraudulent acts, or omissions, of management of the funds. They also claim that EYCI, as the independent and contracted auditors of the funds, are not to be regarded as officers of the funds for the purposes of the articles, with the result that they do not have the benefit of the indemnities in the articles. The liquidators also state that EYCI’s claims,

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insofar as they remain but contingent claims, are not provable as debts in the liquidations.
23 Further, the liquidators claim that, in any event, EYCI’s costs incurred in their defence of the various actions, are not to be attributed to fraudulent acts or omissions of management (as required by the contractual indemnities), nor to be regarded as incurred by EYCI in respect of the discharge of their duties (as required by the indemnity clauses of the articles), but are attributable only to EYCI’s own negligence, in respect of which they were sued. It is, however, important to note that the liquidators do not dispute that EYCI has incurred, or may incur, liabilities and/or costs, and that the liability and/or costs which are being claimed by EYCI relate to audit services provided by them. I now turn to address the liquidators’ grounds for the rejection of EYCI’s proof of debt, although not necessarily in the foregoing order.
Was BHAM part of management?
24 It is plain from the evidence of Mr. L. Daniel Scott, managing partner of EYCI, that throughout the audit engagement of EYCI with the funds, the BHAM defendants were regarded, by all involved, as being a pivotal part of the management of the funds; while EYCI’s engagement as auditors was a matter requiring execution by the directors, the BHAM defendants, for all practical purposes, selected EYCI as the auditors (as they did, for all practical purposes, the administrators (ATC) also). Full discretion, for those purposes, was given to the BHAM defendants, as investment managers within the private placement offering memorandum and the investment management agreements.
25 While the boards of directors were the governing bodies, and the investment manager could have been required to provide reports to the boards, it was, in Mr. Scott’s experience, in these and in the typical fund, seldom the case that the board required additional information, beyond that routinely provided, from the investment manager. More to the point, it was the investment manager who was responsible for formulating and implementing the investment strategy of the funds and so, in practical terms, all decisions around what was to be invested, and how, fell to the investment manager. After all, the management of their investments was the central operational function of the funds, and the appreciation of their net asset value, on behalf of investors, the very reason for their existence.
26 Given these axioms, it was hardly surprising that Mr. Bullmore, in his evidence, did not differ from Mr. Scott in any of the foregoing particulars. It was, moreover, expressly provided in the investment management agreement of BHM, that BHAM, as the investment manager, was to “manage, with discretionary authority, the assets of the funds,” and, in the

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case of Bristol, to “manage the investment and re-investment of the cash, securities and other properties comprising the assets of the funds.”
27 The liquidators’ action is expressly predicated on the BHAM defendants being regarded as the managers of the funds. In their complaint, it is averred that the BHAM defendants, in their role as the funds’ managers, were, by their “mismanagement,” the cause of the funds’ losses—the losses which the liquidators seek to recover in that action. Further references to the management functions of the BHAM defendants (collectively or individually) are also to be seen within their complaint. Moreover, in Mr. Bullmore’s fifth affidavit, filed in these liquidation proceedings, it is specifically confirmed that “the investments of the funds were collectively managed by BHAM.”
28 Still further on this issue, the relevant articles of the funds provide, under the heading “Management,” for the delegation to the investment manager by the directors, of such management powers as may be suitable for the performance of their functions, clearly indicating that, for the purposes of the articles, the investment manager is considered to be “management.” This is notwithstanding the reference to them in the investment management agreement as an “independent contractor.”
29 Apart from the foregoing, it is, as well, the uncontradicted evidence of Mr. Scott, that EYCI throughout regarded the BHAM defendants as occupying the central role as management of the funds, including, for the specific purposes of the provision to EYCI as the auditors, the required representations as to the state of the funds’ affairs. And, while the term “management” is not defined in their engagement letters, it is expressly stated in them that ECYI will “make specific inquiries of management about the representations contained in the financial statements, and the effectiveness of internal controls before reporting.” Such representations, conventionally referred to as “management representation letters,” are required by the generally-accepted US auditing standards to be obtained by auditors in writing, with specific guidance as to the matters to be addressed in them, and to the persons from whom such letters should be sought and obtained. That EYCI’s audits were conducted on the basis of generally accepted US auditing standards, is acknowledged by the liquidators’ complaint and, in his evidence on this appeal, by Mr. Bullmore.
30 Mr. Scott explains (also unrefuted by Mr. Bullmore) that over the course of the audit engagements, at least six management representation letters were provided, all of them including from, and some exclusively from, the BHAM defendants. In at least two of those letters, it is expressly indicated how, in this regard, the BHAM defendants regarded themselves. In the letter of May 24th, 2000, on behalf of Bristol, and in that of May 31st, 2002, on behalf of BHM—signed by BHAM, as well as by the directors and the administrator—are to be found the following representations under the

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heading “General”: “We recognise that, as members of management of the fund, we are responsible for the fair presentation of its financial statements . . .” [Emphasis supplied.]
31 By reference to all the foregoing indicia, I have no difficulty in concluding that BHAM, as the investment manager, was an integral part of their management, and performed the central management function of the funds, these functions also being participated in, in varying degrees, by the administrator (ATC) and the boards of directors.
32 In the chain of causation of the losses for which they claim, EYCI identify the management representation letters as the first link. They point to representations in those letters about the state of the management financial statements upon which they were entitled to, and did, rely, for the purposes of their conduct of the audits, but which proved to be misleading and which, in turn, caused the audits themselves to be misleading.
33 I also conclude, therefore, that the costs of being sued in respect of the audits—whether actual or contingent—are attributable, not only to misrepresentations in the management letters, but also to the underlying fraud of the BHAM defendants, which the management representation letters deliberately concealed.
34 As to the BHAM defendants’ position as a pivotal part of the management of the funds, the evidence also shows that EYCI relied, over the period of the audit engagement, on the assertions that that was so. Without those assertions, the status accorded to the representations—in particular, as to the reliability of the financial statements (including as to the value of the assets of the funds)—would not have been accorded.
35 The liquidators, standing now in the position of the funds as counter-parties to the audit engagement letters, must be estopped from denying EYCI’s right to regard BHAM as part of the management of the funds. See Lord Denning, M.R., in the case of Moorgate Mercantile Co. Ltd. v. Twitchings (15) (in turn citing, in part, Dixon, J. in the earlier case of Grundt v. Great Boulder Pty. Gold Mines Ltd. (7)) ([1976] Q.B. at 241):
“. . . [W]hen a man, by his words or conduct, has led another to believe in a particular state of affairs, he will not be allowed to go back on it when it would be unjust, or inequitable, for him to do so. Dixon, J. put it in these words:
‘The principle upon which estoppel in pais is founded, is that the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt, or accept, for the purpose of their legal relations.’”
36 Whether it will be just to allow a party to resile from its representations will depend on its conduct vis-à-vis other parties, considerations of

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hardship, or prejudice, that may arise, and other matters that may bear on the balance of justice. One other such consideration is the essential requirement that the party relying on the representation has, himself, acted in good faith. There is no suggestion that EYCI have acted in any other way.
37 The principles of equity on this aspect of estoppel are still evolving and must be allowed to develop on a case by case basis. In Lipkin Gorman v. Karpnale Ltd. (11), Lord Bridge remarked, in relation to a claim for restitution based on unjust enrichment being met by the defence, that the defendant had changed his position in good faith. In my view, these emergent principles of equity should be regarded as suitable for application here.
38 In the circumstances of this case, I conclude that the liquidators must be estopped by past conduct (both of the funds and themselves) from denying that the BHAM defendants were within the management of the funds. In any event, should it be otherwise determined that an estoppel does not arise in these circumstances, I also conclude that, as a matter of contract, as provided in the audit engagement letters, BHAM are to be regarded, for present purposes, as having been an integral part of the management of the funds.
Did BHAM act fraudulently?
39 In light of those conclusions, what remains standing in the way of ECYI’s attribution of their losses—actual and contingent—to BHAM, as part of management of the funds, is the liquidators’ further argument that, because, as yet, no court has made a finding that the BHAM defendants actually committed fraud, misrepresentations or wilful default, none of EYCI’s losses are attributable to management conduct. No such limitation upon the concept of attribution is, however, to be found in EYCI’s engagement letters, and so none can, in my view, be superimposed upon the indemnities which they provide.
40 While not yet pronounced by the US court, the liquidators have pleaded in their liquidators’ action, and continue to rely on therein, the allegation that the BHAM defendants acted fraudulently, or wilfully in default, in their publication of the false NAVs. The liquidators may not be allowed to blow hot with those allegations in the liquidators’ action, while seeking to pour cold water on them for the purposes of this appeal. Here too, equity demands that they be estopped from denying that which they themselves continue to allege and plead in court.
41 It is a basic principle of equity and fairness that a court will not permit a litigant to obtain an unfair advantage by adopting the inconsistent positions of approbation and reprobation at the same time. See Lemos v.

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Coutts & Co. (Cayman) Ltd. (10), citing and applying the dicta of Lord Browne-Wilkinson from Express Newspapers PLC v. News (U.K.) Ltd. (5).
42 It is, moreover, on the evidence before me, the agreed position of the liquidators and EYCI that the BHAM defendants did commit the fraudulent acts and relevant defaults alleged against them both in the investors’ actions and the liquidators’ action. The liquidators’ rejection of EYCI’s claims, therefore, ultimately rest upon the liquidators’ further argument that EYCI’s losses are, nonetheless, attributable only to EYCI’s negligence. I now, therefore, turn to deal with the fifth and sixth grounds for rejection together.
To what are EYCI’s losses attributable?
43 Having regard to the foregoing findings, it must be assumed, for the purposes of deciding what losses are attributable to the relevant fraudulent acts, omissions or defaults alleged against the BHAM defendants, that they are guilty of these acts, omissions or defaults. It is important to lay down this marker here, because it is antithetical to the liquidators’ argument that the allegations against EYCI (now dismissed in the investor actions and, as yet, unproven in the liquidators’ action) are the sole causative factor of any losses or liabilities to which EYCI may be subject—to the exclusion, even, of the fact itself of EYCI having been sued in those actions, and its consequences in costs. To resolve this issue, one need only, in my view, consider the meaning of the word “attributable” as it was used in the audit engagement letters between EYCI and the funds. Clear guidance is available from the decided cases, including from the House of Lords.
44 Mr. Jones, Q.C. for EYCI, cited, as a starting point, the judgment of Hodgson, J. in Fleming v. Wandsworth London B.C. (6), in the context of a UK statutory instrument providing that compensation would be paid to certain local government employees who had “suffered loss of employment . . . attributable to a transfer of property order,” made under the London Government Act 1963. Hodgson, J. arrived at his construction of the meaning of “attributable” by an extensive examination of the earlier cases on the point. The following passage was cited by him with approval, as taken from the earlier judgment of Donaldson, J. (as he then was) in Mallett v. Restormel B.C. (13), dealing with a similar question of attribution but arising under a different Act (83 L.G.R. at 288):
“The fundamental problem is whether Mr. Walsh’s loss of employment was ‘attributable to’ any provision of the Act of 1972; that is, the April 1974 reorganisation. These words have been considered in a number of cases, and I do not wish to add the explanations and definitions which have been given. Mr. Griffiths submits that they are

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a wider concept than ‘directly caused by,’ or ‘caused by or resulting from,’ but he accepts that they involve some nexus between the effect and the alleged cause. He suggests that ‘owing to,’ or ‘a material contributory cause,’ or ‘a material cause in some way contributing to the effect’ may be synonymous.
Lord Reid in Smith v. Central Asbestos Co. Ltd., [1992] A.C. 518, said [[1992] A.C. at 533]:
‘“Attributable” has a number of cognate meanings: you can attribute a quality to a person or thing, you can attribute a product to a source or author, or you can attribute an effect to a cause. The essential element is connection of some kind.’
Suffice it to say that these are plain English words involving causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient.”
45 It may not, in my view, be plausibly suggested that there existed no causal connection between the fraudulent acts or wilful defaults of the BHAM defendants, and the actions in which EYCI have been sued. The very basis of the claims against EYCI, in both sets of actions, has been the allegation that EYCI negligently failed to discover and disclose those fraudulent acts and wilful defaults. When one removes (as one must now do, in respect of the investor actions) the element of any negligence on EYCI’s part, the causal connection between BHAM’s conduct and EYCI’s losses suffered as the result of being sued becomes even more direct.
46 On the basis of the principles cited above from the case law, EYCI need only show that there is a more than insignificant contributory causal connection between the impugned conduct of the BHAM defendants (as management) and EYCI’s losses. In all the circumstances here presented, I find that connection to be clearly shown. It is apparent from the statement of their claims in their proofs of debt, that EYCI’s claim for actual losses (i.e. the costs of defending the investors’ actions), and for contingent losses arising from the costs of their defence of the liquidators’ action, is predicated upon EYCI having successfully defended against those actions.
47 In those circumstances, there can, moreover, be no basis for the liquidators’ argument that EYCI’s claimed losses would be attributable to EYCI’s own wrong-doing, or to allegations against EYCI of such wrong-doing. EYCI would then be (and is already, in the investors’ actions, to be) regarded as absolved of such allegations. Other potential losses to EYCI, arising from damages which may be awarded against them in other third-party actions, are also claimed by them.
48 The same principles of causation would apply, but I must next turn to

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consider the nature and extent of the contingency claims that may properly be covered by the indemnities. In her opposition to such a finding, Miss Hatfield cited the cases of Barings PLC v. Coopers & Lybrand (No. 7) (2) and Omni Secs. Ltd. v. Deloitte & Touche (17). I did not find these cases to be helpful. They both dealt with actions taken against auditors in respect of their conduct during the audits of the respective entities, and serve to establish nothing more, for present purposes, than that such claims are actionable in negligence. The present appeal is about the further question of whether the indemnities serve to protect EYCI, not simply from liability for its own negligence (absent its own wilful neglect or wilful default), but also from liability attributable to the fraudulent acts, or wilful default, of others—here, the management of the funds.
49 It is true that the word “attributable” is not used in the indemnity clauses in either BHM’s or Bristol’s articles. Instead, the articles provide, in effect, that the indemnity shall cover all costs, losses or expenses incurred by an officer, or to which an officer “may become liable, by reason of . . . anything done . . . in any way in discharge of his duties . . . including legal costs incurred in defending any proceedings in which judgment is given in his favour . . .”
50 In my view, and for present purposes, the words “may become liable, by reason of” are conditioning words, which speak to the causative link between the discharge of the duties as an officer and the incurring of liability in so doing, in much the same way as does the word “attributable” in the letters of engagement.
Are EYCI’s claims, insofar as they remain but contingent claims, provable debts in the liquidations?
51 On behalf of the liquidators, Miss Hatfield argued that debts are not capable of proof if it is not possible to give a just estimate of their value. In support, she cited, in her written submissions, s.161 of the Companies Law (2004 Revision), r.4.86 of the (English) Insolvency Rules 1986, and a plethora of decided cases on the point. However, only two of those cases—the long standing case of Hardy v. Fothergill (8) and Re T & N Ltd. (19)—were mentioned in her oral arguments, and are the only two I think I need specifically discuss. Hardy v. Fothergill dealt with an obligation, on the part of a bankrupt, to indemnify the assignors of a lease, which they had assigned to him, for any damages they should be liable to pay to the lessors, for breaches by him of the covenants for good repair of the property. The House of Lords held, among other things, that the bankrupt assignee’s liability to indemnify the assignors, was a contingent liability and one which had been provable as a future, or as a contingent, liability in the bankruptcy, unless there was an order of the court declaring it to be a liability incapable of being fairly estimated.

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52 By reliance on Hardy v. Fothergill, which revolved around provisions in the English Bankruptcy Act 1869, not dissimilar to s.161 of the Companies Law (2004 Revision), Miss Hatfield submitted that the contingent liabilities here being claimed by EYCI (as potentially arising from further third party actions, or from the liquidators’ action) are not capable of being fairly estimated.
53 In response, Mr. Jones submitted that the liquidators have applied an incorrect test to the question of whether EYCI’s contingent claims are provable debts, by failing to have regard either to the proper meaning of s.161 of the Companies Law (2004 Revision), to that of the Insolvency Rules 1986, or to the case authorities relating to the nature of provable debts. He argued that whether a “debt” upon an indemnity is provable in the winding up of a company depends not on when the liability of the indemnifier to the indemnified is incurred (i.e. when the debt is quantifiable and can be sued for) but, as illustrated by r.13.12 of the Insolvency Rules 1986, on the date on which the obligation (pursuant to which the indemnifier (here, the funds) may later become subject to the debt or liability, which it must meet on behalf of the indemnified) was incurred.
54 The starting point is s.161 of the Companies Law (2004 Revision), which provides:
“In the event of any company being wound up under this Law, all debts payable on a contingency and all claims against the company whether present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made so far as is possible of the value of all such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value.”
55 It will be immediately apparent from that provision, that whether or not a contingent, or future, claim is admissible to proof cannot depend only on whether it is possible to make a just estimate of it. If the debt is one which exists, albeit payable only upon a contingency, it shall be admissible to proof. The requirement then arises for a just estimate of its value, so far as is possible, to be made.
56 The fact that the liquidators have indeed based their rejection of EYCI’s proof of debt on a misconception in this regard, is apparent from their reasons:
“A right to claim against an indemnifier under the terms of an indemnity, does not constitute a legal liability of the indemnifier to the indemnified, unless, and until, the indemnified has a legal liability in circumstances covered by the terms of the indemnity, and has met that liability.”

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57 This, it must be recognized, is tantamount in the present circumstances to an assertion that unless, and until, EYCI has been successfully sued (whether by third parties or the liquidators), and has so incurred an immediate and legal liability to pay damages in respect of which EYCI would be entitled to be indemnified, the liquidation estates of the funds will have incurred no obligation under the indemnities. Instead, the liquidators may, oblivious to any potential future liabilities, proceed to the distribution of the estate to those claimants whose claims have been accepted as proven.
58 This argument is patently wrong, because it would equate a contingent debt to an actual debt; that is “a legal liability which the indemnified has already met,” as asserted by the liquidators. Rule 13.12 of the Insolvency Rules 1986 (which apply mutatis mutandis and which must, at least, be an aid in the interpretation of s.161 of the Companies Law), defines a “debt,” and explains what debts and liabilities may be proved in a winding up as follows:
“13.12 ‘Debt’, ‘liability’ (winding up)
(1)    ‘Debt’, in relation to the winding up of a company, means (subject to the next paragraph) any of the following—
(a) any debt or liability to which the company is subject at the date on which it goes into liquidation;
(b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and
(c) any interest provable as mentioned in Rule 4.93(1).
. . .
(3)    For the purposes of references in any provision of the Act or the Rules about winding up to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in any such provision to owing a debt are to be read accordingly.”
59 It is EYCI’s case, with which I agree, that the funds incurred an obligation, upon the execution of the engagement letters, to indemnify EYCI in respect of liabilities of the kind covered by the indemnities to which EYCI might, in the future, become subject. As r.13.12(1)(b) explains, “debt,” for the purposes of s.161 of the Companies Law, includes any debt or liability to which the company may become subject after the date of the winding up, by reason of any obligation incurred before that date.

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60 This difference between a “liability” and an “obligation in contract,” for the purposes of r.13.12, is succinctly explained by Richards, J. in Re T & N Ltd. (19) ([2006] 1 W.L.R. 1728, at para. 26):
“By making the contract, a party assumes a legally recognised and enforceable obligation to perform it. A breach of contract is, therefore, without more, a breach of a legal obligation and a cause of action has accrued, even though substantial loss has not yet been suffered and may never be suffered.”
61 And later, adopting the dictum of Lord Reid, on behalf of the majority in the House of Lords in Winter v. Inland Rev. Commrs. (21), as to the meaning of a “contingent liability” as being ([2006] 1 W.L.R. 1728, at para. 51) “a liability which, by reason of something done by the person bound, will necessarily arise, or come into being, if one or more certain events occur, or do not occur.”
62 Here, in this case, the “something done by the person bound,” is the provision to EYCI of the indemnities by the funds, and “the events which have occurred or may occur” are those events by which EYCI may be found liable, in respect of costs or damages for which EYCI would be entitled to be indemnified, under the indemnities.
63 Re T & N Ltd. (19) is a judgment that requires further consideration. In it, Richards, J. provides a comprehensive analysis of the nature of provable debts under English law, including contingent debts. The judgment arose from a consideration of the circumstances in which persons who had suffered, or might come to suffer, from asbestosis, could claim against the T & N Ltd. group of companies, either in contract (as employees), or in tort, in negligence (as third parties). In the context of the T & N Ltd. group’s having gone into administration (in the United Kingdom) and into protective bankruptcy (in the United States), the question was whether provision should be made for the future contingent claims of persons who might yet come to be afflicted by the disease.
64 It was held, under the modern English insolvency regime, that both kinds of contingency claims could be provided for, although it was recognized that under the old regime (similar to that now applicable in this jurisdiction), unliquidated claims in tort (by definition including, therefore, contingent claims in tort) could not be provided for, although contingent claims in contract, such as EYCI’s here, could be. Richards, J., explaining r.13.12 of the Insolvency Rules 1986, confirms ([2006] 1 W.L.R. 1728, at para. 113) that “either they [the provable debts] exist at that date [i.e. the date the company goes into liquidation] or, if they are contingent at that date, they must arise by reason of an obligation incurred before that date.” And ([2006] 1 W.L.R. 1728, at para. 119):
“There is no difficulty in applying r.13.12(1)(b) to a liability arising

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by reason of a contract made before the liquidation date. The company thereby incurs an obligation to perform its terms and any claim under the contract which does not come within para. (a) will be within para. (b).”
And ([2006] 1 W.L.R. 1728, at para. 128):
“The difficulty arises in relation to loss which has not then [by the liquidation date] been incurred, but may be incurred at a later date. Contingent claims are the subject of para. (b). All contingent claims are admissible to proof, provided only that they arise ‘by reason of any obligation incurred’ before the liquidation date.” [Emphasis supplied.]
65 The words emphasized show that contingent contractual claims are included in this dictum, although Richards, J., at that point in his judgment, was dealing specifically with the question of first impression; that is, whether the admissibility to proof in liquidations of contingent debts included claims in tort (i.e. the asbestosis claims, which had accrued before the liquidation date because the disease had been acquired, even though the symptoms had not yet become manifest). As already noted above, the analogy in contract would be the date, prior to the liquidation date, when the contractual obligation was incurred, which would later give rise to a liability to meet the debt arising under it.
66 Examples of the admissibility to proof of such contractual contingent claims are to be found in the case law. As noted in Hardy v. Fothergill (8), the House of Lords held that the lease assignee’s contingent liability to indemnify the assignor for any costs to be incurred under the covenant of repair during the course of the remaining years of the lease was provable as a debt in the bankruptcy of the assignee, subject only to the debt being capable of fair estimation.
67 In Re Midland Coal Coke & Iron Co. (14), the question was whether the lessee of certain coal mines, who had assigned his leases to a company (with covenants to indemnify him against liabilities under the leases), which had then gone into liquidation, having entered into a scheme by which a new company was formed and took over the assets and liabilities of the old company, could still claim against the old company, or was confined to claiming only against the new, as and when the indemnified liabilities actually arose. It was held that because the old company had become defunct, without the lessee having challenged the scheme of arrangement, it was no longer possible for him to claim against the old company, but would have to claim against the new, as and when the contingent liabilities arose as actual liabilities. It was, however, stated by the Court of Appeal ([1895] 1 Ch. at 276) (and assumed to be correct) that, had the lessee claimed in the liquidation of the old company before it became defunct, as a contingent creditor on his indemnity, he “would have

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been entitled to enter a claim . . . and to have assets in the hands of the liquidator set apart to answer . . . [his] claim before the final dissolution of the company.” In effect, the final dissolution of the company could not have occurred until his claim for his contingent liabilities had been fully met, as they became actualized.
68 The earlier decision in Hardy v. Fothergill was considered as possible authority for the proposition that a contingent creditor had the right to have the assets of a limited company in liquidation impounded to meet his claim, on the view that he was not yet able to prove for any ascertainable sum, but would have to claim as and when the liability became actualized. Because, in the case before them, the old company had been finally wound up, and all its assets and liabilities transferred under the scheme to the new company, the Court of Appeal in Re Midland Coal Coke & Iron Co. did not consider that they needed to have finally pronounced on the issue of the right of a contingent creditor to have assets “impounded” to meet his potential claims. They did, however, recognize that the prior case law was to that effect.
69 A modern example of provisions having to be made for contingent liabilities, from Cayman case law, is to be found in In re Transnational Ins. Co. Ltd. (20). There, insurance claims which had been incurred, but not yet reported, were held to be contingent liabilities for which the liquidators of that re-insurance company had to make provisions, before final distribution of dividends. It was stated (as taken from the headnote to the case in The Cayman Islands Law Reports (1998 CILR at 116) and as upheld on this point on appeal, all the way to the Privy Council (2001 CILR 34)) that—
“under s.160 of the Companies Law (1995 Revision) [s.161 of the 2004 Revision] and the English Insolvency Rules, rr. 4.86(2) and 13.12(3), contingent liabilities such as losses incurred but not yet reported by the applicant’s insured were provable as debts in the respondent’s liquidation at an estimated value. Furthermore, the effect of art. 16 of the retrocession [re-insurance] agreement . . . was that the respondent was primarily liable to make provision for such losses and not merely for indemnifying the applicant for payments already made [by the applicant to its insured] . . . Accordingly, there would be no ‘windfall’ for the applicant [as alleged by the respondent], and the respondent must admit the claim to proof.”
70 In the present case, the challenge for the liquidators will be how to arrive at a “just estimate” of EYCI’s indemnity claims, which remain but contingent claims. That difficulty is, however, on the basis of the foregoing discussion of the law, no reason for failing to make provision for them. At this stage, the only guidance I think I can properly give is that the liquidators should not need to provide for amounts of damages to which

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EYCI may become liable based on its “wilful default or wilful neglect, fraud or dishonesty,” as such liabilities are excluded, either expressly (as in the case of the indemnity within BHM’s articles) or implicitly, because of the nature of what has been termed in another context the “irreducible core” of a fiduciary’s obligations; that is the duty to always act in honesty and good faith (see Armitage v. Nurse (1)). These irreducible core obligations would remain, despite the terms of any indemnity, whether given under the audit engagement letters, or under Bristol’s articles.
71 This is a longstanding principle in English company law: see In re City Equitable Fire Ins. Co. Ltd. (4), following In re Brazilian Rubber Plantations & Estates Ltd. (3) (per Romer, J., upheld on appeal to the Court of Appeal). It is a principle which has long since been codified in English company legislation and, by virtue of that codification, it is not possible to give so wide an indemnity as to exclude liability for fraud, dishonesty or wilful default on the part of officers who owe fiduciary obligations to companies: see s.205 of the English Companies Act 1929 (carried over in the 1948 Act) and s.310 of the Companies Act 1985. Liability found against EYCI, based on allegations of simple negligence, may, however, be covered by the indemnities, as would any further legal costs incurred by EYCI in successfully defending against any kind of claim covered by the indemnities.
72 Finally, the liquidators should always have in mind that they may apply to this court for directions—as they may on other matters—as to the proper approach to take for arriving at a just estimate of contingent liabilities, and, as Mr. Jones agreed in his submissions, the liquidators might decide to delay their estimate until after the liquidators’ action is finally resolved.
Was EYCI an “officer” of the fund companies and, as such, also entitled to the indemnities under the articles?
73 In light of the foregoing conclusions as to EYCI’s entitlement to rely on the contractual indemnities, this issue may be thought to be somewhat academic. It is to be addressed, all the same, because of the following concerns. In the event that the contractual indemnities are found, on appeal, not to be available to EYCI, or to have a narrower scope of operation than found to arise from the use of the expression “attributable to management and employees,” EYCI may seek to have recourse to the indemnities in the articles. Furthermore, the categories of loss covered by the indemnities in the articles are potentially wider than those covered by the releases and indemnities in the letters of engagement. The matter having been fully argued, and being one of general importance, this court should address it now.
74 Miss Hatfield, in her submissions, accepted that the auditors may be

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officers of the funds for certain purposes, by virtue of their letters of appointment to that office, but not, she argued, for the purposes of the indemnity provisions in the articles. She was concerned to have that distinction recognized for the practical reason—as she described it—that if the auditors are treated as officers for the purposes of the articles, that would make them part of the management of the funds, and by reliance on the indemnities in the articles, they would be indemnified against liability arising from their own wilful default.
75 For reasons already touched upon by reference to the principle laid down in In re City Equitable Fire Ins. Co. Ltd. (4), I do not see that such a practical dichotomy could arise. This is because all officers of a company owe fiduciary duties of care, which would preclude them from claiming indemnity against loss arising from their own fraud, dishonesty, wilful neglect or wilful default. This is expressly what the BHM articles provide and, in my view, implicitly what the Bristol articles, and the indemnities in some provisions of the letters, also provide.
76 With those considerations in mind, one can now look more closely at the meaning of the word “officer.” Section 2 of the Companies Law (2004 Revision) simply provides that “officer,” in relation to a company, “includes a manager or secretary.” This provision being inclusive only, does not assist with determining whether an auditor is excluded from within the meaning of “officer” of a company: see R. v. Shacter (18), a case based on the English Companies Act 1948, in which that principle was stated, and in which there were primary legislative provisions (s.159)—in terms similar to those within the articles of BHM and Bristol here—mandating the appointment of auditors as officers of companies, upon being so elected at annual general meetings.
77 The legislative framework of the Cayman Islands has not yet made the appointment of auditors a matter of primary legislation, leaving the subject instead to be dealt with by companies in their articles. Here, the articles of the funds themselves contain no definition of what an “officer” is. However, in respect of the auditor, the articles do state, in the same terms, that: “The company shall, at each annual general meeting, appoint an auditor, or auditors, to hold office from the conclusion that meeting, until the conclusion of the next annual general meeting.” [Emphasis supplied.]
78 The articles go on to provide that an auditor must not be disqualified to act as such, and that “. . . if an auditor, to his knowledge, becomes so disqualified during his term of office, he shall thereupon vacate his office.” [Emphasis supplied.] Thus, the articles themselves expressly deem the auditors to be, ipso facto, officers of the funds. In the absence of any implicit reason for imparting to the articles a different meaning, so as to deny EYCI the benefit of the indemnity clauses—or, for that matter, the

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funds, their investors or creditors—the benefits of any duties, or obligations, which the auditor, as an officer, would owe, the express meaning must be taken.
79 The English Court of Appeal in Mutual Reins. Co. Ltd. v. Peat Marwick Mitchell & Co. (16) explained that the question of whether auditors are officers of a company is a question of the construction of the provisions of the articles (byelaws), and of the context of the statute (a Bermuda statute) as well—treating the byelaws as a commercial document, and that “any commercial document” has to be construed, having regard to the surrounding circumstances, and the legal and factual context. In that case, it was found ([1997] 1 BCLC at 2) that “the relevant context is the law of Bermuda, which in many respects follows the law of England.” The Court of Appeal, having reviewed the pre-existing case law (including R. v. Shacter (18), Re Kingston Cotton Mill Co. (9), and the even earlier case of Re London & General Bank (12), found the auditors in the case before them to be officers for the purposes of the statute and the byelaws, including for the purposes of the indemnity given in the byelaws.
80 They specifically approved of the dictum of Kay, L.J. from Re London & General Bank, in which he rejected the argument that an auditor cannot be an officer because an officer must be a person who is concerned with the management of the company, or has at least some measure of control over the assets of the company. In Mutual Reins. Co. Ltd. v. Peat Marwick Mitchell & Co., the Court of Appeal also approved of the earlier dictum of Kay, L.J. in Re London & General Bank, in which he distinguished between auditors appointed by a company to report upon the balance sheet and accounts presented to them by the other officers of the company, and persons who are asked, on an ad hoc basis, to carry out a particular audit exercise, declaring the former, but not the latter, to come within the meaning of “officers of the company.” The former category is, of course, where EYCI must be placed for the purposes of the similar exercise before me now.
81 In support of her argument to the contrary, Miss Hatfield pointed to the fact that, unlike in those last cited cases, in this case there were audit engagement letters, which served to set out the contractual arrangements under which EYCI were appointed as auditors, and so must be read and construed as defining EYCI’s engagement, to the exclusion of the articles. Thus, EYCI would be entitled to rely only upon whatever indemnity is in the letters, but not on those available to officers under the articles. In support she cited In re City Equitable Fire Ins. Co. Ltd. (4), where the following views were expressed ([1925] Ch. at 520):
“In the first place, I think that that article [the indemnity], as the learned judge has held expressly in the case of directors and impliedly, if not expressly, in the case of the auditors, does, in such a

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case as the present, form part of the contract between the company and the auditors, and for that reason that the auditors are engaged, without any special terms of engagement. When that is the case, then if the articles contain provisions relating to the performance by them of their duties, and to the obligations imposed upon them by the acceptance of the office, I think it is quite plain that the articles must be taken to express the terms upon which the auditors accept the position. Of course, if the terms of their employment are expressed in a separate document, then that document must be taken to define the condition of their engagement, and it would not be proper to assume any implied terms, either from the provisions of the articles, or elsewhere.” [Emphasis supplied.]
82 While there is obvious general force in that dictum, I do not think it can be taken to entirely exclude the operation of the articles from the contractual arrangements (including the engagement letters) here, between EYCI, as their auditors, on the one hand, and the funds on the other. This is, in my view, for the reason first of all that nothing in the audit engagement letters purports to so exclude the operation of the articles. In fact, the letters are expressed in terms as being “[confirmatory] of the engagement to audit and report on the financial statements” of the funds; not as “exclusively defining” the nature of that engagement. The auditor (EYCI) must, moreover, be taken as being aware of the articles, which are the byelaws of the company, at least insofar as they touch and concern their engagement as auditors. And so, to the extent that the terms and conditions of the engagement letters do not conflict with the articles, the parties must be taken as having accepted the applicability of the articles as well.
83 The treatment of the auditors in the articles as officers of the funds has implications—in terms of rights and responsibilities—not just for the parties to the engagement themselves (i.e. the auditors and the funds), but for third parties as well. These may be creditors and other members of the public (e.g. investors), who may rely upon the auditors being regarded as officers of the funds, thus owing them fiduciary duties, for the purposes of their own dealings with the funds. These are all implications of the auditors being regarded by the articles as officers of the funds, implications which, therefore, go well beyond just the express benefit of the indemnity given to them in the articles.
84 In Re Kingston Cotton Mill Co. (9), Vaughan Williams, J. identified some of the main incidents of the functions of an auditor, which would constitute him an officer of a company, in terms which, on the facts of the present case, I find to be applicable. This is notwithstanding that, on appeal on the particular facts of that case, the Court of Appeal, while upholding Vaughan Williams, J.’s decision, did not see the need to attempt

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as wide a definition as he did. He expressed himself as follows ([1896] 1 Ch. at 13–14):
“I confess I do not quite understand what Mr. Eady [for the defendant/auditors, as the applicants] suggests as being sufficient to prevent the applicants, in the present case, from being officers of the company. I have already pointed out that they are not called in to perform an accidental, or occasional, duty. They are called in to perform the duties of an office, which is created by the articles themselves. He says that they are paid by fees. So are the directors. He says that they are not appointed permanently; they are selected from time to time. So are the directors. I think it is much the safest thing in a case of this sort simply to say that, having regard to the articles of this company, I have come to the conclusion that these particular auditors are officers of this company. But, although that may be the safest thing to do, I cannot persuade myself to stop short at that stage. I prefer to say at once that I think these auditors are officers of the company because they have to perform a duty which is prescribed by the articles—a duty which they have to perform in conjunction with the [other] officers of the company—a duty the performance of which, as appears by the articles, will necessarily be the basis of the action of the shareholders, in reference to the annual declaration, or non-declaration, of a dividend. I cannot conceive why such persons should not be officers.”
85 In the circumstances of this case, nor can I. Nothing about their letters of engagement conflicts with, or precludes, EYCI being regarded as officers of these funds, within the meaning of the articles. For all the foregoing reasons, I conclude that they are officers, and are entitled to rely on the indemnities in the articles, as those might augment and do not conflict with those in the engagement letters, subject to the limitation that the articles do not indemnify liability for the kinds of conduct or neglect, which are in any event, expressly or implicitly excluded.
86 In light of all the foregoing conclusions, contrary to the liquidators’ grounds for rejection, EYCI’s appeal was allowed. The liquidators are required to admit to proof EYCI’s claims in respect of their actual and contingent losses, and in the case of the contingent claims, to make a just estimate of them, and provision for them accordingly.
Appeal dismissed.
Attorneys: Maples & Calder for the applicant; Solomon Harris for the respondent.