Johnson v Deloitte & Touche AG

• Jurisdiction: Cayman Islands
• Judge: (Zacca, P., Georges J.A. and Rowe, Ag. J.A.)
• Judgment Date: 03 April 1997
• Court: Court of Appeal (Cayman Islands)
• Date: 03 April 1997

Court of Appeal

(Zacca, P., Georges J.A. and Rowe, Ag. J.A.)

JOHNSON and DINAN

and

DELOITTE AND TOUCHE A.G.

I.G.A. Hunter, Q.C. and A. Turner for the appellants;

G.C. Vos, Q.C. and A. McN. McLaughlin, Jnr. for the respondents.

Cases cited:

(1) Adam Eyton Ltd., In re, ex p. CharlesworthELR(1887), 36 Ch. D. 299, considered.

(2) Adams (A.J.) (Builders) Ltd., Re, [1991] BCLC 359; [1991] BCC 62, distinguished.

(3) Amalgamated Properties of Rhodesia Ltd., In reUNK(1914), 30 T.L.R. 405, distinguished.

(4) Arrows Ltd., Re, [1992] BCC 121, distinguished.

(5) Att. Gen. (Duchy of Lancaster) v. London & N.W. Ry. Co., [1892] 3 Ch. 274, applied.

(6) Bridgend Goldsmiths Ltd., Re, [1995] 2 BCLC 208; [1995] BCC 266, considered.

(7) British Nation Life Assur. Assn., In reELR(1871), L.R. 14 Eq. 492, distinguished.

(8) Bullard & Taplin Ltd., Re, [1996] BCC 973, considered.

(9) Charterland Goldfields Ltd., In reUNK(1909), 26 T.L.R. 132, distinguished.

(10) Commonwealth v. O”Reilly (1984), 8 A.C.L.R. 804; sub nom. Re 67 Budd Street Pty. Ltd., Commonwealth v. O”Reilly, 2 A.C.L.C. 190.

(11) Corbenstoke Ltd. (No. 2), Re, [1990] BCLC 60; (1989), 5 BCC 767, dicta of Harman J. applied.

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

(13) Karamelli & Barnett Ltd., In re, [1917] 1 Ch. 203; (1916), 115 L.T. 753, considered.

(14) Keypak Homecare Ltd., Re, [1987] BCLC 409; (1987), 3 BCC 558, distinguished.

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

(16) New De Kaap Ltd., In re, [1908] 1 Ch. 589, followed.

(17) Norwich Provident Ins. Socy., In re(1879), 49 L.J. Ch. 187; 28 W.R. 272, distinguished.

(18) Oxford Bldg. & Inv. Co., ReUNK(1883), 49 L.T. 495, considered.

(19) Parkdawn Ltd., Re, Chancery Division, Case No. 004367/93, unreported, distinguished.

(20) Rica Gold Washing Co., In reELR(1879), 11 Ch. D. 36; 40 L.T. 531.

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

(22) Sankey Furniture Ltd., Re, ex p. Harding, [1995] 2 BCLC 594, distinguished.

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

(24) South Carolina Ins. Co. v. Assurantie Maatschappij ‘De Zeven Provincien’ N.V., [1987] A.C. 24; [1986] 3 All E.R. 487, dicta of Lord Brandon of Oakbrook applied.

(25) Tavistock Iron Works Co., ReUNK(1871), 24 L.T. 605; 19 W.R. 672, considered.

(26) Webb”s S. Extended Silver Mining Co. Ltd., [1896] 6 BCPC 47, considered.

(27) Wenlock v. Moloney, [1965] 1 W.L.R. 1238; [1965] 2 All E.R. 871.

Legislation construed:

Companies Law (1995 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 1995), s.104: The relevant terms of this section are set out at page 145, lines 5–7, .

s.106(1): The relevant terms of this sub-section are set out at page 126, lines 29–31.

s.140: The relevant terms of this section are set out at page 145, lines 24–34.

s.143: The relevant terms of this section are set out at page 126, lines 33–37.

s.150: The relevant terms of this section are set out at page 145, lines 13–15.

s.151: The relevant terms of this section are set out at page 145, lines 17–20.

s.152(2): The relevant terms of this sub-section are set out at page 126, lines 40–42.

s.153: The relevant terms of this section are set out at page 128, line 42 – page 129, line 4.

Companies-liquidators-removal-locus standi of applicant-under Companies Law (1995 Revision), s.106(1) only persons with positive financial interest in distribution of assets (creditors of insolvent company) may apply to show due cause for removal-no application by debtor or potential debtor

Companies-liquidators-removal-due cause-conflict of interest may be due cause of removal under Companies Law (1995 Revision), s.106(1) only if likely to influence treatment of creditors-applicant for removal must have positive financial interest in liquidation

Companies-liquidators-control by court-winding up under court”s supervision-applicant for injunction to restrain liquidators acting under conflict of interest must have positive financial interest in liquidation-liquidator”s duties in insolvent liquidation owed to court and creditors only

Companies-liquidators-control by court-winding up under court”s supervision-liquidator”s conflict of interest may justify court”s intervention only if likely to influence treatment of creditors-breach of guidelines for professional conduct not proof of unconscionable behaviour

The appellants applied to the Grand Court, seeking to strike out the respondent”s summons for the restraint or removal of the liquidators of a company.

The appellants were appointed as liquidators of Omni Securities Ltd., an insolvent company which had been placed in voluntary liquidation, and whose liquidation was ordered to continue subject to the court”s supervision. The appellants were partners in a firm of accountants whose associated firm formerly audited the accounts of other companies in the Omni Group. The respondent firm of accountants, together with other companies then within the same international group, now faced legal proceedings brought by the appellants as liquidators for negligence and breach of contract in the preparation of the accounts of Omni Securities Ltd.

The respondent alleged that the appellants were acting under a conflict of interest in failing to bring any action against their associated firm, which was at least equally liable for any losses sustained by Omni Securities Ltd., due to the involvement of its predecessor in auditing Omni Group accounts. The respondent applied under s.106(1) of the Companies Law (1995 Revision), as applied by s.153 to supervised windings up, to show due cause for the liquidators” removal and, under the court”s inherent jurisdiction, for an order to restrain them from continuing the litigation.

The Grand Court (Smellie, J.) held that the respondent was entitled to apply under s.106 as a person interested in the conduct of the liquidation, since the test for locus standi was whether in all the circumstances the applicant was a proper person to apply. Further, having established its locus standi, the respondent would be permitted to show due cause on the basis of the apparent conflict of interest affecting the liquidators. And the court could in any event have issued an injunction to restrain the liquidators, as officers of the court, from acting unconscionably in the course of a liquidation under its supervision, without the need for an application by a person financially interested in the outcome. The proceedings in the Grand Court are reported at 1996 CILR 202.

On appeal, the appellants submitted that (a) the proper construction of s.106(1), taking account of the legislative intentions apparent from the rest of the Companies Law and the persuasive English case law, was that locus standi to apply for the removal of a liquidator in an insolvent liquidation was restricted to those having a positive financial interest in the outcome of the liquidation, namely creditors, and was not afforded to a mere potential debtor such as the respondent; (b) since the respondent did not have locus standi to apply, the question of whether due cause existed for the liquidators” removal did not arise; (c) any potential conflict of interest affecting the liquidators was insufficient to invoke the court”s inherent jurisdiction to give injunctive relief since (i) the liquidators had not infringed any legal or equitable right of the respondent merely by bringing legal proceedings against it and not against certain other firms in the international group to which their firm now belonged; and (ii) the liquidators had not acted unconscionably as officers of the court, their duties in the conduct of a liquidation under the court”s supervision being to the court and to the creditors, who were themselves at liberty to apply to the court if not satisfied that the liquidators were acting impartially.

The respondent submitted in reply that (a) the trial judge had properly concluded that the categories of persons having locus standi to apply for the removal of a liquidator were not closed, and since s.106(1) was silent as to who might apply to show due cause, the ‘proper person’ test of locus standi was appropriate to permit the respondent to apply even though it had no positive financial interest in the outcome of the liquidation; and (b) it was also entitled, as a person affected by the conduct of the liquidation, to bring the liquidators” conflict of interest to the court”s attention, since the liquidators had acted unconscionably in pursuing litigation against the respondent and should not be permitted to continue to act by reason only that no creditor had sought to remove them.

Held, allowing the appeal:

(1) It was settled law that only persons with a positive financial interest in the outcome of a liquidation could apply to show due cause for the removal of a liquidator. The Grand Court had erred in adopting the ‘proper person’ test which could only lead to unmeritorious claims, since it had viewed s.106(1) of the Companies Law (1995 Revision) in isolation rather than against the broad scheme of the legislation. This showed that the interests of contributories and creditors were paramount in questions relating to the winding up of a company. Accordingly, as a mere potential debtor which could not benefit from the liquidation through a share in the company”s assets and legal action against whom would positively benefit its creditors, the respondent had no locus standi (page 133, lines 14–42; page 139, line 44 – page 140, line 37; page 153, lines 8–34; page 154, lines 13–19; page 155, lines 6–14; page 176, lines 31–34; page 177, lines 18–35; page 178, lines 6–32).

(2) Nor did the respondent have sufficient standing to apply for an injunction to restrain the liquidators under the court”s inherent...