Introduction
The role and function of a liquidator has unique features. While they have the duties of a fiduciary – charged with the responsibility of collecting, realising and distributing the liquidation estate[1] – they also have the ability to pay themselves out of that estate.[2] This introduces a tension because whatever the liquidator retains for themself from the estate becomes unavailable for distribution to the creditors.[3]
Additionally, in performing their role, a liquidator must exercise their own best judgement in determining what has to be done and how to do it most effectively. They are not under the instruction or control of a client, as would typically be the case for an attorney, accountant or auditor. A liquidator therefore has extraordinary discretion and latitude in fulfilling their duties as an officer of the Court.[4]
The courts have therefore required that liquidators establish that any remuneration from the estate for which they seek approval is fair and reasonable in all the circumstances.[5] This is a function of the liquidator’s duty to account. They must justify being allowed to keep another’s property for themself based on the work they have done.[6] However, the remuneration application process can vary from court to court in the common law world, including with respect to the level of supporting evidence liquidators should provide.[7] In this context, CL Financial Ltd provides some guidance to liquidators in the Cayman Islands when seeking their remuneration – albeit that its focus is the remuneration regime in a different jurisdiction. This article considers the key principles from the JCPC’s decision and the potential implications in the Cayman Islands.
Background
The case concerned an appeal from the Court of Appeal of Trinidad and Tobago regarding the remuneration of the liquidators of CL Financial Ltd, a company in compulsory liquidation (Company).[8]
The Company was the ultimate parent company of a large corporate group with diverse business interests in several countries.[9] When it encountered financial problems in 2008, the Government of Trinidad and Tobago provided the Company with a staggering TT$23 billion (approximately US$3.4 billion) to prevent its collapse.
Despite this financial support, the Company could not overcome its financial struggles and in September 2017, a winding up order was made.[10] The Government was its largest creditor.[11] Given the complexity of the liquidation, the Court appointed two insolvency practitioners with very considerable experience in international insolvencies as liquidators.[12]
In July 2020, the liquidators applied to the court for approval of their fees and expenses for approximately US$3.175 million.[13] The Government strongly disputed the application.[14] It presented a wide range of objections, including that the evidence provided by the liquidators was lacking.[15]
Decision
At first instance, the liquidators’ application was approved.[16] The Court of Appeal subsequently set aside the Judge’s order, albeit based on a procedural error.[17] The unanimous majority held, among other things, that the Judge was required to conduct a “line by line examination” of the evidence and that he had failed to do so.[18]
In its judgment, the Board principally focused on two issues: (i) whether courts should conduct a line by line analysis; and (ii) the appropriate level of information liquidators should provide when seeking approval of their remuneration.[19]After examining the authorities in various common law jurisdictions (although unfortunately the Cayman Islands missed the cut),[20] the JCPC provided a helpful list of guiding principles on both these issues. These are set out below.
On the facts, although the JCPC said that it disagreed with significant parts of the Court of Appeal’s judgment.[21] it ultimately dismissed the appeal because principally it considered that the liquidators had not provided sufficient supporting information, particularly given the complexity of the liquidation.[22]
Applications in the Cayman Islands
Before turning to the JCPC’s guidance in CL Financial Ltd, it is useful to set out briefly the legal framework for liquidators’ remuneration in the Cayman Islands.
The Law
The Grand Court has jurisdiction to fix a liquidator’s remuneration under the Companies Act.[23] When approaching remuneration applications, the Courts will have two key principles in mind: (i) first, the objective of the application is to ensure that the amount and/or basis of any remuneration fixed by the Court is fair, reasonable and commensurate with the nature and extent of the work properly undertaken by the officeholder, and that the work charged has resulted in significant and proportionate benefits to the estate;[24] and (ii) second, whether an officeholder has acted properly in undertaking particular tasks at a particular cost, the test being whether a reasonably prudent man faced with the same circumstances in relation to his own affairs, would use his own money in the same way.[25]
The Procedure
The Cayman regime provides that a liquidator is not entitled to receive any remuneration without the approval of the Court;[26] and an application to Court cannot be made without first seeking the approval of the liquidation committee (LC).[27] The LC’s role in this context is to assess the “reasonableness” of the liquidator’s fees.[28] Although the LC’s approval is not essential for a subsequent Court application to succeed,[29] the outcome of the LC’s assessment has significance on the liquidators’ next steps.
- If the LC approves the proposed remuneration, the Court will generally take comfort from its assessment,[30] place considerable reliance on its decision,[31] and it will usually be self-evident that a prima facie case for approval has been made out.[32] Given this, the Court’s inquiry will generally be limited,[33] and the liquidator’s application will usually be determined on the papers without the need for a formal hearing.[34] It is not customary for the Court to give reasons for these types of applications.[35]
- If the LC withholds approval but does not contest the Court application, the Court is not required to assume a more onerous adjudicative burden – rather it will only have to satisfy itself that a prima facie case has been made out, and there is nothing “eyebrow-raising” about the level of fees.[36]
- Where the LC objects to the remuneration, the liquidator will bear the burden of proving to the Court that the remuneration sought is reasonable and justified.[37] The Court will scrutinise the application far more closely,[38] and will, where necessary, consider the fees in depth and detail.[39] There is well established case law on how the LC should articulate its objections, which we have considered separately in our article dated 14 February 2022 (here), including where the objection is a “core” challenge versus a “resources” challenge. In such circumstances, the Court will assess the challenges to the fees claimed on a structured and informed basis;[40] however, generally speaking, the exercise should be limited and not become disproportionately large.[41]
Overarching Principles
The JCPC laid down the following overarching principles for remuneration applications:
- Liquidators occupy a fiduciary position and may not apply assets of the estate for their own benefit without proper authority.[42]
- The burden is on liquidators to justify any remuneration for which they seek approval.[43]
- If after considering the evidence, the court has any element of doubt, the application should be resolved against the officeholder.
- The court should give weight to the fact that the officeholder is an officer of the court and a member of a regulated profession. It should therefore be assumed that they are behaving with integrity.
- The remuneration fixed by the court should be fair and reasonable for the work properly undertaken.[44]
The above principles broadly align with those applied in the Cayman Islands. Principles 1, 2, and 5 have been expressly endorsed by the Grand Court (as noted in the relevant footnotes above). While principles 3 and 4 have not been expressly stated in recent Cayman authority, it is clear that their underlying rationale is consistent with the Grand Court’s approach. For example, for principle 3, where the LC objects to the liquidators’ fees, the Courts will scrutinise the application far more closely and consider the fees in detail if necessary. For principle 4, in Re Direct Lending Segal J had strong regard to the professional judgment of the JOLs on considering their remuneration application which had been opposed by the LC. [45]
Sufficiency of Supporting Information
JCPC Decision
The JCPC also provided helpful guidance on the level of information liquidators should provide in remuneration applications. The two high-level principles identified were (noting that the level of information required will ultimately be dictated by the circumstances of the case):
- There must be sufficient information to enable the court to have a clear view of what the officeholder has done.[46]
- The information should be proportionate to the size of the insolvency and to the cost of preparing the information.[47]
In addition, the JCPC stated the following guiding principles:
- The evidence must be sufficient to enable the court to satisfy itself that the remuneration is justified. However, the court should not be burdened with an overwhelming amount of detail (and nor should the estate be burdened with the cost of producing it).[48]
- The court should not engage in a line by line analysis.[49] While it should not act as a rubber stamp, the court must always apply its own judgement.[50]
- The JCPC also identified common themes across the jurisdictions for assessing the remuneration of insolvency officeholders. The key themes include.[51]
- In large international insolvencies, time spent is usually the only means by which remuneration is assessed.
- The officeholder must establish that the time costs were reasonably incurred. This principally turns on demonstrating two factors: first, that the work in question was reasonably undertaken; and second, that the work was performed by a person of appropriate seniority.[52]
- Where a liquidator has discretion, the steps taken should make commercial sense in terms of potential return to the estate.[53] Where time is the sole criterion, it is the reasonableness of the step when it was taken, rather than the actual outcome, which is relevant.
- The officeholder must show that the work was performed at an appropriate level of seniority, and that the work done between staff members was not unnecessarily duplicative.
Cayman Islands
There is significant alignment with Cayman Islands law and the JCPC’s principles above (which are noted in the relevant footnotes above for brevity). However, while the issue of “sufficiency of information” has been dealt with on an ad-hoc basis in Cayman cases,[54] the Grand Court has not clearly addressed the issue square on. The JCPC decision therefore comes as welcome guidance for both liquidators and LCs.
We have set out below some observations about the JCPC’s decision which Cayman liquidators should bear in mind going forward when seeking approval of their remuneration:
- As liquidators will be well familiar with, the liquidator has the burden of placing sufficient evidence before the court, with a view to establishing that the approval amount is fair and reasonable.[55] Procedurally, the liquidator is first required to provide the LC with a report and accounts containing all the information reasonably required to enable a creditor and contributory to make an informed decision about the reasonableness of the remuneration amount in which the Court’s approval is being sought.[56]
- At a minimum, the report should include: a description of the work undertaken (and the respective tasks within each stream); a breakdown of the number of hours expended on each task with the respective hourly rates of the fee earners; an explanation as to what the work was intended to achieve and an account of what has been achieved; and in particular, whether it has resulted in assets being realised and how the work has affected the prospects of realising further assets.[57] As to the latter, it should be noted that the JCPC stated that where time is the sole criterion, what matters is the reasonableness of the step when it was taken, rather than the actual outcome.[58]
- Further details will often be required. Liquidators should have regard to the JCPC’s principles set out above. In addition, liquidators may consult the English Practice Statement on The Fixing and Approval of the Remuneration of Appointees[59] for further specific guidance of what to include in a report, section 5.2 in particular.[60]
- The information provided should be proportionate to the size and complexity of the liquidation. For larger insolvencies, while liquidators should not burden the court with an overwhelming amount of detailed evidence,[61] they should not hesitate to provide a greater level of detail otherwise they risk having their fees rejected, as was the case in CL Financial Ltd..[62] That said, liquidators should generally look to achieve the appropriate balance in advance of the hearing, as the Court may not give them the opportunity to file further evidence after the hearing.[63]
- One particular point to note is the JCPC’s recognition of the so-called “at large” assessment of remuneration.[64] This means that the Court can override the result reached by an assessment of time reasonably spent if it considers the remuneration overall is not fair and reasonable. While it has not featured as the prevailing approach in the Cayman Islands, given that the LC’s assessment of a liquidator’s fees is on a “reasonableness” standard, it may be that the Cayman courts are more willing to adopt this additional layer of assessment in the future.
[1] Section 110(1)(a) of the Companies Act (2025 Revision).
[2] Subject to, as explained below, the requisite approvals being obtained.
[3] This tension was generally observed by Ferris J in Mirror Group Newspapers v Maxwell [1998] BCC 324 at pp.333-334 (Mirror Group Newspapers), quoted by Smellie CJ in In Re Sphinx Group of Companies (in Official Liquidation) (Unreported, FSD 16 of 2009, 13 November 2012) at [17] (Re Sphinx) (see also [2012 (2) CILR Note 11]).
[4] In Re Liberty Capital Limited, Integrity Limited, Holdings Limited and Waterford Insurance Limited [2002 CILR 606] at [57] (Smellie CJ, Sanderson J and Henderson Ag J) (Re Liberty Capital). See also generally section 110 of the Companies Act, which sets out the function of an official liquidator, including the powers which may be exercised with or without sanction of the Court under Parts I and II of Schedule 3.
[5] See for example Judgment at [31] & [44]; Re Sphinx at [25]; In Re Direct Lending Income Feeder Fund, Ltd (in Official Liquidation) (Unreported, FSD 108 of 2019, 3 February 2022, Segal J) at [58] (Re Direct Lending) (see also [2022 (1) CILR Note 5]).
[6] Mirror Group Newspapers at p.333 quoted by Smellie CJ in Re Sphinx at [17].
[7] As illustrated in the analysis provided by the JCPC in the Judgment at [49]-[102].
[8] Judgment at [2].
[9] Judgment at [3]. The group had a large and diversified corporate structure with subsidiaries in at least five major sectors in several jurisdictions; and with seven sub-holding companies and over 40 subsidiaries: Judgment at [3] & [5].
[10] Judgment at [4].
[11] Judgment at [2]-[4], with over TT$15.5 billion owing as at July 2017.
[12] Judgment at [4], noting that one liquidator was subsequently replaced.
[13] Judgment at [8]. The liquidators also applied for the approval of the fees and expenses of certain corporate directors appointed by the liquidators.
[14] Judgment at [10]. The liquidators had also previously made an application in around May 2019 which had not been opposed.
[15] A full list of the Government’s objections is at [10], noting that the JCPC observed that the Government appeared to have underestimated the amount of work inevitably involved in the liquidation of a holding company with international operations: Judgment at [11].
[16] Judgment at [13]-[15].
[17] Judgment at [21]-[22]. The first instance Judge had initially provided his reasons by short email to the parties in July 2021, with his substantive judgment following in November 2021 (Judgment at [14] & [17]). However, in determining the appeal, the Court of Appeal only considered the initial email and overlooked the subsequent judgment.
[18] Judgment at [21] & [25].
[19] Judgment at [28] & [48].
[20] Judgment at [49]-[102].
[21] Judgment at [151]. The JCPC also said that the Court of Appeal’s decision was wrong because it overlooked the Judge’s substantive reasons given in November 2021: Judgment at [22].
[22] See Judgment generally at [119]-[129].
[23] Section 109; with the procedure being governed by the Insolvency Practitioners’ Regulations (2023 Consolidation) (IPR) and the Companies Winding Up Rules (2023 Consolidation) (CWR) (see especially IPR reg 10-13; CWR O.11). See generally the Privy Council decision of Attorney General v Cleaver & Ors [2006 CILR 222] on the Grand Court’s powers to set liquidators’ fees both under the Companies Act and its inherent jurisdiction.
[24] Re Direct Lending at [58]; In Re World Properties Limited (in Official liquidation) (Unreported, FSD 49 of 2018, 3 October 2022) at [18] (Re World Properties). See also Perry at [23](g)]; Re Direct Lending at [47]; Re Sphinx at [25].
[25] Re Sphinx at [18] citing with approval Ferris J in Mirror Group Newspapers at 333-334; In Re Caledonian Securities Limited (in Official Liquidation) [2016 (1) CILR 309]; Re Direct Lending at [58]; Re World Properties at [16].
[26] IPR, reg 10(1); although a liquidator may receive a payment on account up to 80% without court approval, with any net overpayment to be repaid to the estate: IPR, reg 10(2) & (3). Any remuneration application to Court must be served on the liquidation committee: CWR, O.11, r.2(1).
[27] IPR, reg 12. See also In Re Saad Cayman Limited [2012 (1) CILR 159] at [10]; In Re Herald Fund SPC (in Official Liquidation) (Unreported, FSD 27 of 2013, 1 April 2021) at [20] (Re Herald Fund (1 April 2021)); In Re Herald Fund SPC (in Official Liquidation) (Unreported, FSD 27 of 2013, 4 June 2024) at [10] (Re Herald Fund (4 June 2024)). The genesis of this regime was laid down by Chief Justice Smellie in Re Liberty Capital at [50]. If a liquidation committee has not been established, the liquidator can alternatively convene a meeting of creditors and/or contributories proposing a resolution for approval: IPR, reg 12(1)(b).
[28] IPR, reg 12(2); Re Herald Fund (1 April 2021) at [46]. However, it should be noted that the LC does not have an express statutory role under the Companies Act: see Re Herald Fund (1 April 2021) at [11] referring generally to section 115 of the Act.
[29] See the discussion of Kawaley J in Re Herald Fund (1 April 2021), where his Lordship noted at [14]-[15] & [53] that the LC has no express or implied power to bind a liquidator, and its role is a consultative one, limited to high-level approval of work-streams coupled with practical commercial assessments of regular budgets and fee reports.
[30] Re Direct Lending at [48].
[31] Re Herald Fund (1 April 2021) at [20].
[32] Re Herald Fund (1 April 2021) at [21].
[33] Re Direct Lending at [48].
[34] Re World Properties at [5].
[35] Re Herald Fund (1 April 2021) at [21].
[36] Re World Properties at [20]-[23].
[37] Re Sphinx at [10] cited with approval in Re Herald Fund (1 April 2021) at [23].
[38] Re Herald Fund (1 April 2021) at [20]. See also Re Liberty Capital at [62](f).
[39] Re Direct Lending at [48].
[40] In Re One Tradex Ltd (in Provisional Liquidation) (Unreported, FSD 166 of 2019, 17 June 2022, Ramsay-Hale J) at [46], cited with approval by Kawaley J in Re World Properties at [18]-[19] where His Lordship noted that there is otherwise an obvious risk that the liquidators will incur unnecessary costs dealing with unmeritorious objections, and the Court’s resources will be wasted.
[41] Re Direct Lending at [48].
[42] Re Sphinx at [17] per Smellie CJ quoting Mirror Group Newspapers at pp 333-334.
[43] Re Sphinx at [10] per Smellie CJ, cited with approval in Re Herald Fund (1 April 2021) at [23] per Kawaley J.
[44] Judgment at [44]. This is a widely accepted legal principle in the Cayman Islands, as noted above under the section entitled “The Law”.
[45] See for example [50]-[52] & [56].
[46] Judgment at [48]. See Re Sphinx at [21] per Smellie CJ for Cayman endorsement.
[47] Judgment at [48]. See Re Direct Lending at [59] per Segal J citing Brook v Reed for Cayman endorsement
[48] Judgment at [114]. See Re Direct Lending at [48] per Segal J and Re Herald Fund (1 April 2021) for Cayman endorsement.
[49] Judgment at [115]. See Re Direct Lending at [48] per Segal J for Cayman endorsement.
[50] Judgment at [113]. See Re Sphinx at [13] per Smellie CJ for Cayman endorsement.
[51] For the full list, see Judgment at [104]-[115]. See generally Re Direct Lending per Segal J where his Lordship applied a number of these principles in determining the JOLs’ fee application.
[52] Judgment at [109] outlines further factors relevant to whether the work was reasonably undertaken, including the statutory duties of the officeholder; whether there are other legal obligations to meet, such as holding the assets on trust; and whether the steps taken to deal with the assets are reasonable, such as maintaining value.
[53] Noting that whether any particular action is reasonable will necessarily depend on the particular circumstances: Judgment at [110].
[54] For brief statements of principle from the Grand Court, see Re Liberty Capital at [56]; In Re Tait International Limited [2002 CILR Note 4] (Re Tait); In Re Segoes Services Limited (in Liquidation) [2007 CILR 148] at [6]-[8] (Re Segoes Services); Re Direct Lending [48] & [59] citing Brook v Reed [2012] 1 WLR 419; Re World Properties at [21].
[55] Re Direct Lending [58]-[59].
[56] IPR, reg 12(2). See also Re Segoes Services at [6]. The LC can make a request for more information and a liquidator need not comply if one of the categories under CWR O.9, r.4(2) exists, although in practice this approach may not be sensible.
[57] Judgment at [123]; Re Tait [2002 CILR Note 4].
[58] Judgment at [110].
[59] [2004] BCC 912.
[60] Re Direct Lending at [47].
[61] Judgment at [114].
[62] Judgment at [123] & [125].
[63] Re Direct Lending at [62].
[64] Judgment at [46].
