Under s192 of the Isle of Man Companies Act 1931, a Committee of Inspection shall consist of both creditors and contributories in such proportions as may be agreed by the meetings of creditors and contributories. Under this section, if there is a difference between the determinations of the meetings of the creditors and contributories, the court shall make a determination as to the Committee’s constitution as it thinks fit.

The purpose of the Committee of Inspection is to supervise the liquidation and to fix the remuneration of the liquidator. Ordinarily, and in accordance with its supervisory function, the liquidator will therefore consult with the Committee of Inspection before making key decisions, particularly on potentially controversial issues or in relation to litigation which may affect the recovery for the general body of unsecured creditors (such as the decision whether or not to take legal action to recover assets).

The analogous position in England & Wales is different to the Isle of Man in that contributories no longer ordinarily sit on the equivalent of the Committee of Inspection, which is now known as a “Liquidation Committee” under the Insolvency Act 1986. In this regard, whilst in a compulsory liquidation both the creditors and the contributories will be invited to establish and appoint the creditor members of the committee (although the creditors choice will prevail), it is only creditors who have proved for their debts and which haven’t been disallowed for voting or distribution or dividend purposes, that will be allowed to sit on the Liquidation Committee under the Insolvency Act 1986. The only exceptions to this are where the company in question is being wound-up on grounds other than on the inability to pay its debts or where creditors have decided against establishing a Liquidation Committee.

The recent change in position in England & Wales acknowledges the fact that Committees of Inspection are there for the benefit of the general body of unsecured creditors, and not for the benefit of contributories who ordinarily would have little interest in the recovery of assets for distribution to the general body of unsecured creditors, but who may instead be interested in sitting on the Committee of Inspection for an ulterior motive, such as to prevent investigation of wrongdoing and the pursuing of litigation to recover assets.

In the factual circumstances of this case the Applicants argued that it was inappropriate for the sole contributory to sit on the Committee of Inspection alongside the proved creditors in the liquidation. The Court agreed and made an order that the Committee of Inspection shall consist of the two proved creditors who are both respectively owed multi-million dollar debts from Global Steel Holdings Limited.

The judgment confirmed that in cases where a company is hopelessly insolvent and there is no prospect of a surplus being recovered in the liquidation, it would generally be inappropriate or serve no purpose for a contributory to sit on the Committee of Inspection. The judgment went further to confirm that, if there are other particular valid reasons or justifications for seeking to exclude a contributory, the court has the discretionary power to order that a contributory is excluded dependent on the facts of the case.

Caren Pegg and Mark Emery acted for the successful Applicants (Moorgate Industries UK Limited and the State Trading Corporation of India) being the only two proved creditors in the liquidation to date.

The full reported judgment can be accessed here.

Type

Insight

Locations

Isle of Man

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