Banco Economica S.A. v Allied Leasing and Finance Corporation (No. 2)

JurisdictionCayman Islands
JudgeSmellie, J.
Judgment Date27 February 1998
CourtGrand Court (Cayman Islands)
Date27 February 1998
Banco Economica S.A.
and
Allied Leasing and Finance Corp. (No. 2)

Smellie, J.

Grand Court

Company law - Liquidator — Removal — Whether company director has locus standi to apply for removal of provisional liquidator

Practice and procedure - Costs — Security for costs — No order for security against foreign company in liquidation if large bank controlled by foreign government—appointed liquidator and prima facie likely to succeed in action.

Practice and procedure - Affidavit evidence — Whether the court may extend the time limit for affidavit opposing winding—up petition under Insolvency Rules, r. 4, 18(1) if petition raises complex issues of fact and petitioner already granted ex parte relief.

Appearances:

Myers & Alberga for the applicant

W.S. Walker & Co. for the petitioner

Bruce Campbell & Co. for the provisional liquidators

Smellie, J.
1

Locus standi

2

On the basis of a petition to wind up the company presented pursuant 20 to s.95 of the Companies Law (1995 Revision) (“the Law”) this court, in the exercise of its powers under s.105 of the Law, has appointed provisional liquidators in connection with the preservation of the assets and undertakings of Allied Leasing & Finance Corporation (“the company”), pending the hearing of the petition.

3

The petitioner is a major Brazilian bank, now itself in liquidation, which petitions as a creditor of the company on the basis that the company is unable to meet liabilities owed to it. These liabilities are said to have arisen from the company being used, by persons mutually connected as former officers of the petitioner and of the company, as a cipher through which to perpetrate fraud on a massive and complex scale against the petitioner by the misappropriation of its funds. To put it simply, it is alleged on behalf of the petitioner that the company was established ostensibly as an offshore investment vehicle to invest in Brazilian securities on behalf of the petitioner but was used instead by its operatives as a means of siphoning off and misappropriating several hundred million dollars' worth of assets.

4

I now have before me what is styled an ordinary application under r.7.2 of the English Insolvency Rules 1986, made by William Donnelly. He is described as the sole director of the company and seeks various directions and forms of relief, namely:

1
    That the time for service for the hearing of the ordinary application be abridged. As the application is made under the Insolvency Rules, Part 7, it should have been served at least 14 days prior to today's hearing but was in fact not filed-and presumably not served-until February 9th, 1998. It is therefore at least 9 days out of time. This abridgement of time was granted without the opposition of the petitioner, although Mr. Hildyaxd, Q.C. indicated that there could be no consent to that aspect of the application requesting the discharge of the liquidators being heard ahead of the petition. 2. An adjournment of the petition to wind up which is set to be heard on Friday, February 19th, i. e. next Friday. 3. An extension of the time for service of the company's evidence in response to the petition. 4. An order for the cross-examination of Mr. Flavio Cunha, the liquidator of the petitioner, whose affidavit grounds the petition to wind up. 5. An order for security for the costs of the hearing of the petition against the petitioner, Banco Economico, which is a foreign entity. 6. The discharge of the order of January 8th, 1998 by which the provisional liquidators were appointed.
5

This ordinary application — in every aspect — is predicated on the basis that Mr. Donnelly has locus standi to bring it. The relief and directions sought in paras.2–5 presume the existence of his locus standi to be heard upon the hearing of the petition itself. The relief sought in para. 6 presumes locus standi to apply for the discharge of the provisional liquidators.

6

Mr. Hildyard raises the preliminary objection that Mr. Donnelly, in his capacity as director of the company, can have no locus standi to bring this application in any of its aspects and more particularly no locus standi to seek the order for the discharge of the provisional liquidators. He cites in support of that submission the primary authority contained in the Insolvency Rules, rr.4.31 and 4.25. These rules apply in the Cayman Islands in the absence of local rules by virtue of the Grand Court Rules, 0.102. These rules specifically provide that only a creditor, contributory, the provisional liquidators or a company itself may apply for the termination of the appointment of a provisional liquidator.

7

Mr. Donnelly's application is intituled in his own name. In the draft affidavit of a Mr. Azevedo, which is also to be filed in support of Mr. Donnelly's application, Mr. Donnelly is described as “a director, or at least a former director” of the company. Mr. Lowe, who represents him, tells me that his instructions are that Mr. Donnelly is the sole director of the company. The first report of the provisional liquidators describes him, however, as one of two directors. In that state of uncertainty about Donnelly's capacity, Mr. Lowe invites me nonetheless to proceed on the basis that Donnelly can represent the company, or at least has the residual power, which remains in its board of directors to bring this application on behalf of the company. That is on the basis that he is the sole director. Mr. Lowe is not, however, in a position here and now to present any authorization by way of resolution either of the board or of the contributories, to that effect. So the difficulty that confronts Mr. Lowe in that state of affairs is that he is unable to assert that Donnelly acts on behalf of the company itself by virtue of authorization in general meeting.

8

In In re Union Accident Ins. Co. Ltd. it was held that notwithstanding the appointment of a provisional liquidator on a petition for winding up, the board of directors of a company retained the residual power to instruct solicitors and counsel to oppose the petition and to seek the discharge of the provisional liquidator. In a very brief judgment, Plowman, J. there explained why that residual power continues to exist in the board notwithstanding that the provisional liquidators, once appointed, must generally be regarded as standing in the right of the company.

9

Mr. Hildyard cited the case of In re Emmadart Ltd., which decision, although not mentioning In re Union Accident Ins. Co. Ltd., declares in definitive terms that in the absence of clear and express powers given in the articles, the directors cannot resolve to present a petition in the name of a company without authorization from the shareholders in general meeting. As I understand Mr. Hildyard's submission, the nexus between the rule in In re Emmadart Ltd. and the present case is one arising by parity of reasoning: If the directors have no locus standi qua directors without the authorization of the company in general meeting to present a petition, they can have no standing as directors to apply to remove provisional liquidators.

10

Mr. Hildyard sought to draw further support for his submissions from the decision in the very recent case of Re Mid East Trading Ltd. In that case it was held that only a party having locus standi to appear on the hearing of a petition to wind up a company had locus standi to apply to rescind the winding-up order. The categories of persons there defined clearly exclude directors acting as such and would only include them if they were authorized to object on behalf of a company by that company itself in general meeting or if specially authorized by the articles. An example of a company itself applying for the removal of its provisional liquidators and for the appointment of others in their stead is to be seen in Re Arrows Ltd.

11

The general force of Mr. Hildyard's submissions as to the capacity and standing of directors must, it seems to me, be acknowledged having regard to the fact that the law in the Cayman Islands is as it was in England prior to the changes introduced there by the Insolvency Act 1985, now in s.124 of the 1986 Act. Section 124 of the Insolvency Act 1986 now enables the directors acting unanimously (if more than one), to petition to wind up and so also to oppose a petition to wind up. Taken in the historical context, it also appears that s.124 was introduced to reverse the decision in In re Emmadart Ltd., which, as we have seen, operates in the context of the pre-1985 legislation to prevent directors from...

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