Allied Inv Fund Ltd v Johnson

• Jurisdiction: Cayman Islands
• Judge: (Murphy, J.)
• Judgment Date: 20 May 1999
• Court: Grand Court (Cayman Islands)
• Date: 20 May 1999

Grand Court

(Murphy, J.)

ALLIED INVESTMENT FUND LIMITED, ASSET MANAGEMENT AND FINANCE INTERNATIONAL INCORPORATED and GULF CANADIAN INTERNATIONAL FINANCE COMPANY INCORPORATED

and

JOHNSON and JENKINSON

M. Phillips, Q.C., J.R. McDonough and J.E Goldring for the applicants;

R.H. Hildyard, Q.C. and G.A. Locke for Banco Economico S.A.;

A.J. Jones and Ms. W.I. Ebanks for the respondent liquidators;

J.V. Martin, Q.C., T.G.W. Lowe and Ms. L.D. DaCosta for Sakura Inv. & Fin. Corp.

Cases cited:

(1) Adam Eyton Ltd., In re, ex p. CharlesworthELR(1887), 36 Ch. D. 299, dicta of Bowen, L.J. applied.

(2) Association of Land Financiers, In reELR(1878), 10 Ch. D. 269.

(3) Bank of Credit & Commerce Intl.S.A. (No. 3), Re, [1993] BCLC 106; [1992] BCC 83; on appeal, [1993] BCLC 1490, dicta of Nicholls, V.-C. applied.

(4) British Nation Life Assur. Assn., In re(1871), L.R. 14 Eq. 492.

(5) Compagnie d”Escomptes Financiers S.A. v. Georgian Bay Holdings Corp., 1998 CILR N–8, observations of Murphy J. applied.

(6) Corbenstoke Ltd. (No. 2), Re, [1990] BCLC 60; (1989), 5 BCC 767, applied.

(7) Edennote Ltd., Re, Tottenham Hotspur v. Ryman, [1996] BCC 718; [1996] T.L.R. 348, dicta of Nourse, L.J. applied.

(8) Esal (Commodities) Ltd., Re, [1989] BCLC 59; (1988), 4 BCC 475, dicta of Dillon, L.J. applied.

(9) Intercontinental Properties Pty. Ltd., Re(1977), 2 A.C.L.R. 488, applied.

(10) International Credit & Inv. Co. (Overseas) Ltd., In re, 1992–93 CILR 83.1992–93 CILR 83.

(11) Johnson v. Deloitte & Touche A.G., 1997 CILR 120, dicta of Rowe, Ag. J.A. applied.

(12) Keypak Homecare Ltd., Re, UNK[1987] BCLC 409; (1987), 3 BCC 558, applied.

(13) Lowestoft Traffic Servs. Co. Ltd., ReUNK(1985), 2 BCC 98, 945, applied.

(14) Marseilles Extension Ry. & Land Co., In re(1867), L.R. 4 Eq. 692; 17 L.T. 61.

(15) Mirror Group Newspapers PLC v. Maxwell (No. 2), [1998] 1 BCLC 638; [1998] BCC 324, dicta of Ferris J. applied.

(16) Palmer Marine Surveys Ltd., In re, [1986] 1 W.L.R. 573; (1985), 1 BCC 99, 557, applied.

(17) Rubber & Produce Inv. Trust, In re, [1915] 1 Ch. 382; (1915), 112 L.T. 1129, followed.

(18) Sir John Moore Gold Mining Co., In reELR(1879), 12 Ch. D. 325, considered.

(19) Tavistock Ironworks Co., ReUNK(1871), 24 L.T. 605; 19 W.R. 672, dicta of Lord Romilly applied.

Legislation construed:

Companies Law (1998 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 1998), s.107(1): The relevant terms of this sub-section are set out at page 251, lines 33–35.

s.170(2): The relevant terms of this sub-section are set out at page 251, lines 36–40.

s.154: ‘…[A]ny order made by the Court for a winding up subject to the supervision of the Court shall … confer on the Court authority to make calls or enforce calls made by the liquidators and to exercise all other powers which it might have exercised if an order had been made for winding up the company by the Court….’

Companies-liquidators-removal-due cause-broad discretion to remove liquidator on application by majority creditor-removal justified by, e.g. conflict of interest, pursuit of litigation against creditors” wishes, failure to investigate alleged misfeasance by former directors-views of minority creditor secondary if also controlling shareholder and allied to former management

Companies-liquidators-liquidation of international group-liquidators to explore possibility of global liquidation of related companies in interests of saving costs

The applicants applied for the removal of the liquidators of a company.

The applicants were majority creditors of Transworld Bank and Trust Co. (‘TW’), a company in voluntary liquidation. The respondents had acted as the auditors of TW until it had been placed in voluntary liquidation and were appointed joint liquidators by its owners. The company issued a declaration of solvency, and the liquidators acted for three years on this basis, though none of the company”s debts to the applicants were paid.

TW”s major shareholder (and minority creditor), Sakura, was controlled by the former management of TW and of its associated companies, Allied Leasing and Finance Corp. (‘AL’), and Banco Economico S.A. (‘BE’), also in liquidation. The applicants were subsidiary companies of AL.

TW commenced proceedings against BE in respect of, inter alia, securities allegedly held on trust for it by BE, and BE issued a defence and counterclaimed for moneys which had been paid to TW by the common management prior to BE”s being placed in administration by the Central Bank of Brazil. The liquidators were supported in this litigation by Sakura and the former management. BE was granted a Mareva injunction by the Grand Court in aid of its counterclaim and TW was later placed under the supervision of the court.

The applicants applied for the removal of the respondent liquidators and their replacement by the liquidators already acting for AL, and the

respondent liquidators sought directions as to whether they should pursue TW”s cause of action against BE.

The applicants submitted that they had shown due cause for the removal of the liquidators under the Companies Law (1998 Revision), s.107(1), since (a) in the case of an insolvent company such as TW, their views as majority creditors should prevail over those of Sakura, the shareholder; (b) TW was manifestly insolvent-its only prospect of meeting its liabilities being to obtain and enforce judgment against BE in the proceedings commenced on its behalf-and therefore the respondents were acting under a conflict of interest and contrary to the ethical conduct rules of their profession by acting as liquidators for a company whose accounts they had previously audited; (c) as the cause of action against BE could not be regarded as commercially viable unless it was bound to succeed, the liquidators were not acting in the best interests of TW in pursuing it; (d) the liquidators, having been appointed by the former management, had not only closed their eyes to the insolvency of the company, but had also failed to conduct any inquiry into the trading practices of those managers in the context of the liquidation; and (e) furthermore, they had refused to consider a global approach to the liquidation of all the BE-related companies, instead treating TW in isolation, which was uneconomical.

The respondents submitted in reply that (a) the court was required to consider the interests of all persons with a financial interest in the liquidation when exercising its discretion under s.107(1), including, in the case of a solvent company, its shareholders; (b) they had properly accepted their appointment as liquidators of TW, having satisfied themselves that the company was solvent at the time of its voluntary liquidation; (c) they were justified in pursuing TW”s cause of action against BE with the aim of recovering company assets unless the litigation had no prospect of success; (d) they had made all proper inquiries into the transactions preceding TW”s liquidation.

Held, ordering that the respondents be removed as liquidators:

(1) The solvency of TW depended on the prospects of success for the liquidators in TW”s cause of action against its associated company, BE. The respondents” decision to prosecute the action was justifiable as a reasonable business decision in these circumstances only if the prospect amounted to virtual certainty, since otherwise the cause of action was at best a contingent asset. On the evidence available to the court, TW”s main claim in respect of the securities allegedly held on trust by BE for TW had a less than 50% chance of succeeding. More important, however, was the considerable difficulty, expense and delay that would be involved in enforcing a judgment obtained in the Grand Court against assets of BE in the Brazilian courts. The court preferred the evidence of the applicants” experts that there was practically no prospect of enforcement in Brazil and therefore TW could not be regarded as solvent on the basis of the value of the cause of action (page 249, line 24 – page 251, line 4).

(2) The court had a broad discretion to remove a liquidator on due cause shown by a person with a financial interest in the liquidation, under the Companies Law (1998 Revision), s.107(1). It was unnecessary for the applicants to show that the liquidators were personally unfit to act as such. Here the respondents would be removed in the general interests of the company. The entire liquidation had been conducted on a very partisan basis. Their startling lack of objectivity in continuing to prosecute the cause of action against BE, against the wishes of the majority creditors, and failure to investigate claims against the former directors who had appointed them had resulted, quite reasonably, in a total loss of confidence on the part of the applicants. Furthermore, they had acted under a conflict of interest by acting as liquidators of an insolvent company for which they had previously acted as auditors. Since it had been their duty to inquire into the solvency of the company when first appointed, they should have resigned when it became apparent that TW was insolvent. The views of the minority creditor (Sakura) could in this case be disregarded, since it was first and foremost a shareholder which could gain nothing in an insolvent liquidation, and was closely connected with the former directors (page 251, lines 5–9; page 256, line 41 – page 257, line 18; page 257, line 39 – page 258, line 23; page 259, lines 30–41; page 262, line 33 – page 263, line 22).

(3) Given that the affairs of TW were inextricably entwined with those of its parent company and the other subsidiary, AL, it would save time and expense for the liquidation to be conducted by the same liquidators, who could amass information from the related companies, seek to pool their assets and pay all creditors a similar dividend. This could not be achieved by the respondents” compartmentalized...