Re PAC Limited (in official liquidation): how to empower Cayman liquidation committees
In the liquidation of a Cayman company, it is sometimes assumed that the liquidation committee of the insolvent Cayman company can do little if it disagrees with decisions by liquidators.
A Cayman Islands Grand Court ruling on 11 December 2015 serves as a reminder that this is incorrect. The battle was over whether or not the liquidators should settle claims on terms that the liquidation committee considered were inadequate. The liquidation committee appointed counsel to make their points to the court and their view prevailed over the liquidators’. The court refused to allow the liquidators to enter into the proposed agreement. Appleby acted for the committee.
CORPORATE liquidation Application
The joint official liquidators of PAC Limited had negotiated a settlement agreement with potential defendants to a claim for USD44 million. The deal needed court approval to become binding under Cayman rules (“sanction” in the language of the Cayman rules). The liquidators were proposing to settle the claim in exchange for a cash payment of USD2.5m, coupled with the waiver of a creditor claim against the company and an agreement that the defendants pursue and finance a separate USD17.49m claim of the company against a third party. The liquidators lacked significant funding and the cash payment barely covered the existing liquidation fees and expenses.
liquidation committee VIEW
The liquidation committee strongly opposed the settlement agreement and argued that the liquidators should join other proceedings in Lebanon that related to the same USD44 million claim. Initially the committee did not engage Cayman counsel, instead making their objections directly to the court. At that stage the liquidators were able to persuade the court to grant a conditional sanction, but the court suspended the operation of the sanction to give the committee a last chance to make its objections through Cayman counsel.
Justice Foster reasoned that the correct approach to be taken was following the English Court of Appeal in Greenhaven Motors Ltd (in Liquidation) and Re Edennote Ltd (No 2). As a result:
- in an ordinary case the court would attach considerable weight to the liquidators’ views unless the 1 [1999] BCLC 635 2 [1997] 2 BCLC 89 evidence reveals substantial reasons why it should not do so;
- in deciding whether or not to sanction the proposed compromise the court must consider those who have a real interest in the assets of the company and whether their interests are best served by permitting the company to enter into the proposed compromise or by not permitting the company to enter into the compromise;
- the court will not give weight to the wishes of those unaffected whichever way the decision goes but will give considerable weight to the interests of those affected as they, if uninfluenced by extraneous considerations, are likely to be good judges of where their own best interests lie; and
- it is, at the end of the day, for the court to decide whether or not to sanction the compromise before it, not to decide whether the compromise is the best that could be obtained or could be better if it did not contain all the terms that it does contain.
Liquidation settlement agreement
Foster J concluded that the case was not an ordinary one as the circumstances had changed since the liquidators negotiated the settlement agreement and a funding option was now available. He concluded that the creditors, represented by the liquidation committee, were best placed to judge where their own interests lay. The committee strongly opposed the settlement agreement and expressed a belief that the litigation they proposed to fund would result in a better return for them. Even though the liquidators did not agree with them, Foster J concluded that the stakeholders’ best interests were served by not sanctioning the settlement agreement and so refused to do so.
Cayman insolvency
The case shows that the Cayman court does not simply rubber stamp liquidators’ decisions. It will attach considerable weight to the views of a liquidation committee taking proactive steps to be heard. In a suitable case the view of the committee about what is in the best interests of the creditors can prevail over the view of the liquidators. Where a committee has concerns about decisions of the liquidators they can appoint legal counsel under express provisions of the winding up rules in Cayman. Those rules also give the liquidation committee the ability to be represented at certain hearings as of right. The costs of representation are treated as an expense of the liquidation.
If the committee had not engaged counsel here, then the settlement agreement would have been sanctioned against the strongly felt wishes of the committee.
Appleby were then engaged by the committee and successfully opposed the sanction application on the basis that it would be of no benefit to the stakeholders of the company. A member of the committee also put forward a funding proposal for the liquidators to commence proceedings in Lebanon against the potential defendants.
The liquidators argued that at the time of reaching the settlement agreement, no practical alternative was available to them and that, whilst there was little left for the stakeholders of the company from the cash payment after satisfaction of the liquidation fees and expenses, the principal rationale for the settlement agreement derived from the funding of the other proceedings. They argued that this represented the best prospect for a return to the company and that they should not be required to reject the settlement agreement and continue to fund the liquidation without any certain payment of their fees and expenses.
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