Proof of debt process during insolvency

In an insolvent liquidation, a person claiming to be a creditor and seeking to recover a debt must lodge a proof of debt with the official liquidator.[1] The creditor must include with the proof copies of all documents evidencing the existence and amount of the debt.[2] The liquidator may require further information from the creditor[3] and/or that the proof be verified by affidavit.[4]

The liquidator adjudicates the claims in a quasi-judicial capacity[5] and must notify the creditor whether the claim has been accepted or rejected (in part or in full).[6] If the proof is rejected,[7] the liquidator must provide reasons for the rejection and notify the creditor of their appeal rights.[8]

Appeal to the Grand Court

A creditor can appeal to the Grand Court to seek to have a liquidator’s rejection of proof reversed or varied.[9] The appeal must be made within 21 days of the date on which the creditor was notified of the rejection.[10]

The following principles are relevant to an appeal:

  1. The hearing is a de novo adjudication of the creditor’s proof. This means that the Judge hears the appeal afresh and is not bound by the usual restrictive rules of an appellate court. The creditor may rely on additional evidence, even though he/she may not have made such evidence available to the liquidator at first instance.[11]
  2. The appeal is summary in nature and therefore discovery and cross-examination will ordinarily not be required, although the Court in its inherent jurisdiction can order otherwise depending on the facts of the case.[12]
  3. The burden of proof is on the appealing creditor, on the balance of probabilities, to satisfy the Court their claim is founded on a real debt.[13] Claims based on tenuous or inadequate proof will not succeed.
  4. The liquidators are not required to justify the rejection of the proof. [14] However, where they make a positive allegation in relation to any aspect of the claim, they will bear the burden of proof on that issue.[15] For example, if the liquidators’ case is that the claim is fictitious or fraudulent, the onus will be on them to prove so.
  5. If a creditor is not satisfied with the Grand Court’s decision, he/she can appeal to the Cayman Islands Court of Appeal as a matter of right.[16] 

Decision

North Sound Pharmaceuticals Inc. (Company) which was put into liquidation on 13 July 2022. The Company had been part of a corporate group established for the purpose of conducting pharmaceutical research and development. David Lickrish, the group’s founder, was the sole director of the Company. On 5 May 2022, when the petition was presented, Mr Lickrish entered into an Executive Employment Agreement, which he signed both in his capacity as director of the Company and in his personal capacity. He submitted a proof of debt to the Joint Official Liquidators seeking sums pursuant to that employment agreement, including c.US$6 million in severance pay. The JOLs partially rejected his proof.[17] Mr Lickrish appealed to the Grand Court.

The JOLs contended that the employment agreement was invalid for various reasons, including that (i) the agreement was not supported by consideration; (ii) the agreement did not comply with the Labour Act; (iii) the agreement was a voidable preference; and (iv) that Mr Lickrish breached his fiduciary duty as director in countersigning the agreement.[18]

Justice Parker rejected the JOLs’ arguments, found that on the evidence there was no breach of fiduciary duty, rejected the argument of preference and found that the employment agreement was valid and enforceable against the Company.

Comment

  1. The decision provides a useful reminder of the principles and procedure applicable to appeals to the Grand Court against a liquidator’s rejection of proof. Importantly, the hearing of the appeal is summary in nature. The parties will not ordinarily engage in discovery, witness evidence and cross examination, unless an application is made prior to the hearing.[19]
  2. Parties to the appeal should therefore consider whether it is necessary to apply to Court prior to the hearing to have discovery, witness evidence and cross examination included as part of the process. In this case, the Court made clear that if the JOLs had pursued particularised claims for breach of fiduciary duty against Mr Lickrish, or that the employment agreement was a voidable preference, discovery, witness evidence and cross examination would be necessary to resolve the contested factual questions that would arise – a summary hearing would not be appropriate.
  3. As an interesting aside, the Court also noted that the petition, although filed on the Court’s e-filing platform at 5.08pm on 5 May 2022, was deemed to have been presented on 6 May 2022 in accordance with the relevant practice direction.[20] Therefore, for the purpose of any voidable disposition of Company property argument under section 99 of the Companies Act, the winding up order was deemed to have been made on 6 May 2022, the day after the employment agreement was entered into. This underscores the importance of filing a petition on the Court’s e-Filing platform before 5pm if it is to be considered filed that day.

 

[1] CWR, O.16, r.1(2). In certain circumstances, the Court may sanction an application to dispense the requirement for parties to submit proofs of debt – for example, where it results in a cost-effective and quicker process in the liquidation: see Premier Assurance Group SPC Ltd (in Official Liquidation) (FSD 264 of 2020 (ASCJ)) (Unreported, 10 September 2021).
[2] CWR, O.16, r.2(4).
[3] CWR, O.16, r.2(5).
[4] CWR, O.16, r.2(7).
[5] CWR, O.16, r.1(4).
[6] CWR, O.16, r.6.
[7] CWR Form No 26.
[8] CWR, O.16, r.6(3).
[9] CWR, O.16, r.17. A creditor can also apply to Court to expunge an admitted proof on the ground that it should not have been admitted, provided that the admitted proof exceeds CI$100,000 or 5% of the company’s total liabilities (whichever is the less): CWR, O.20(3).
[10] CWR, O.16, r.18(1). The appeal is made by summons in CWR Form No 30, supported by affidavit, and must be served on the liquidator.
[11] CWR, O.16, r.18(5).
[12] See, for example, China Branding Group Limited (in Official Liquidation) (FSD 52 of 2016 (RMJ) (Unreported, 1 December 2017).
[13] North South Pharmaceuticals at [54] & [55]. See also Midland Acres Limited (in Official Liquidation) (FSD 88 of 2017 (RPJ)) (Unreported,
[14] North South Pharmaceuticals at [54]. See also Midland Acres at [37].
[15] North South Pharmaceuticals at [56] citing Bhatti and Sons Incorporated v Wight [2003 CILR 160] at [35]-[41].
[16] Court of Appeal Act (2023 Revision), section 6(f)(v).
[17] The JOLs admitted a portion of his proof (US$152,335.91) and rejected the remainder (US$6,634,071.21).
[18] The extent to which the latter two arguments were pursued by the JOLs is not clear in the decision.
[19] See, as above, China Branding Group Limited (in Official Liquidation) (FSD 52 of 2016 (RMJ)) (Unreported, 1 December 2017).
[20] Practice Direction 11 of 2020, paragraph 9.1.

Key Contacts

Alan Bercow

Partner: Cayman Islands

T +1 345 814 2036
E Email Alan

Daniel Coelho

Senior Associate: Cayman Islands

T +1 345 814 2752
E Email Daniel

Susan Fallan

Counsel: Cayman Islands

T +1 345 814 2767
E Email Susan

David Lee

Partner: Cayman Islands

T +1 345 814 2083
E Email David

David Lewis-Hall

Counsel: Cayman Islands

T +1 (345) 814 2047
E Email David

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