Re Caledonian Securities Ltd (in official liquidation)

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 05 May 2016
• Court: Grand Court (Cayman Islands)
• Date: 05 May 2016

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF CALEDONIAN SECURITIES LIMITED (IN OFFICIAL LIQUIDATION)

R. Levy, Q.C. for the joint official liquidators;

T. Lowe, Q.C. for Global Asset Allocation Fund, Saad Investments Finance Company (No. 5) Ltd. and Bristol Investment Fund Ltd.;

D. Harby for Nova Holding Group Ltd.;

J. Hale for the liquidation committee of Caledonian Bank Ltd.

Cases cited:

(1) Ahmad Hamad Algosaibi & Bros. Co. v. Saad Invs. Co. Ltd., 2010 (1) CILR 553, referred to.

(2) Allanfield Property Ins. Servs. Ltd. v. Aviva Ins. Ltd., [2016] Lloyd”s Rep. I.R. 217; [2015] EWHC 3721 (Ch), referred to.

(3) Ayerst (Inspector of Taxes) v. C. & K. (Constr.) Ltd., [1976] A.C. 167; [1975] 3 W.L.R. 16; [1975] 2 All E.R. 537, considered.

(4) Berkeley Applegate (Investment Consultants) Ltd., In reELRWLRUNKUNKUNK, [1989] Ch. 32; [1988] 3 W.L.R. 95; [1988] 3 All E.R. 71; [1989] BCLC 28; (1987), 4 BCC 274; further proceedings, sub nom.In re Berkeley Applegate (Investment Consultants) Ltd. (No. 3)UNK(1989), 5 BCC 803, applied.

(5) Boardman v. Phipps, [1967] 2 A.C. 46; [1966] 3 W.L.R. 1009; [1966] 3 All E.R. 721, referred to.

(6) Caledonian Bank Ltd., In re, 2015 (1) CILR 143, referred to.

(7) China Pacific S.A. v. Food Corp. of India (The Winson), [1982] A.C. 939; [1981] 3 W.L.R. 860; [1981] 3 All E.R. 688; [1982] 1 Lloyd”s Rep. 117, followed.

(8) Downshire Settled Estates, In re, [1953] Ch. 218; [1953] 2 W.L.R. 94; [1953] 1 All E.R. 103, followed.

(9) Duke of Norfolk”s Settlement Trusts, In re, [1982] Ch. 61; [1981] 3 W.L.R. 455; [1981] 3 All E.R. 220, referred to.

(10) G.B. Nathan & Co. Pty. Ltd., In re(1991), 24 NSWLR 674; 5 ACSR 673; 9 ACLC 1291, referred to.

(11) Lehman Bros. Intl. (Europe) v. CRC Credit Fund Ltd., [2012] 3 All E.R. 1; [2012] Bus. L.R. 667; [2012] 1 BCLC 487; [2012] UKSC 6, referred to.

(12) Marine Mansions Co., In reELR(1867) L.R. 4 Eq. 601, referred to.

(13) Mirror Group Newspapers plc v. Maxwell (No. 2), [1998] BCC 324; [1998] 1 BCLC 638, referred to.

(14) Scott v. Nesbitt(1808), 14 Ves. Jun. 438; 33 E.R. 589, referred to.

(15) SPhinX Group, In re, 2012 (2) CILR N[11], considered.

(16) Wight v. Eckhardt Marine G.m.b.H., 2003 CILR 211; [2004] 1 A.C. 147; [2003] 3 W.L.R. 414; [2003] BCC 702; [2004] 2 BCLC 539; [2003] UKPC 37, referred to.

Companies—liquidators—liquidation of securities investment business—court may order liquidators” fees and expenses of returning custody assets to customers to be paid from custody assets (held on trust by company)—costs to be proportionate and reasonably incurred in returning assets to beneficial owners—if complex liquidation of securities company with 188 custody asset customers, liquidators” costs may be divided proportionately between customers (with 30:70 cash to securities weighting) rather than requiring strict accounting of exact cost of returning each customer”s assets

The applicants applied for an order entitling them to recover their fees and expenses from assets held on trust by the company of which they were liquidators.

The applicants were joint official liquidators of a company which, prior to its liquidation, had provided fiduciary and custody brokerage services. The company (and various sub-custodians) held cash and securities on trust for its 188 customers (‘custody asset customers’). At the time of appointment of the liquidators, the value of the custody assets was approximately US$573m.

Returning the assets to their beneficial owners was a complex process. The applicants incurred indirect costs (including the cost of forensic work, the steps taken to secure data held by the company and the preliminary attempt to sell the business of the company); trading costs (including the cost of retaining essential company staff and overhead costs incurred by the company); legal costs; voluntary liquidation costs; and disbursements (i.e. personal payments made by the applicants in relation to statutory advertising and filing of notices at the Registry of Companies). The applicants applied for an order entitling them to recover sums in respect of their fees and expenses from the trust assets. The court authorized them to deal with the custody assets in accordance with the instructions of each customer. They were not required to deal with any customer”s assets until the customer paid 1% of its assets (or authorized such payment) into a reserve account established by the applicants. That account was established and distributions were made to a large majority of customers.

The applicants brought the present application seeking an allowance for their work in relation to the custody assets generally (not in relation to the liquidation of the company); the extent of any such allowance; and directions as to how it should be satisfied (i.e. from the reserve generally, or in some other manner). They submitted that the court had an equitable jurisdiction to grant an order enabling them to have recourse to the custody assets to recover their fees and expenses. As regards apportionment, the applicants identified several different methods, none of which the objectors accepted. The applicants acknowledged that none of the methods was precise but proposed that the court should approve the method whereby the reserve of each custody asset customer would bear a proportionate share of the total costs by reference to the total value of all custody assets, subject to a cash to securities adjustment of 30:70, which reflected the increased costs of dealing with securities compared to cash.

Four customers, who (together with the liquidation committee of one of the sub-custodians, which also expressed concern) were the beneficial owners of 55% of the assets, objected to the application. They submitted that, since the assets from which the applicants wished to recover their costs and expenses were trust assets and did not form part of the company”s liquidation estate, the applicants were obliged simply to return them to their beneficial owners with no deductions in respect of their fees and expenses other than the actual costs of returning the assets. The objectors were concerned that they would be disproportionately affected by the requirement to contribute 1% of their assets to the reserve. They submitted inter alia that (a) the applicants” proposed method of apportionment was inequitable because it required customers whose legal position was straightforward to bear a higher proportion of the costs on the ground that they held a greater proportion of the trust assets even though the legal position of some customers who held fewer assets was more complex and expensive to resolve; and (b) the applicants should instead be required to calculate and charge each customer the exact costs incurred in returning its trust assets. In relation to the quantum of the fees and expenses that the liquidators sought to recover, the objectors submitted that (a) if the applicants were permitted to recover their fees and expenses from the assets by virtue of their role as agents of necessity for the liquidated company, they could only recover expenses that were reasonably incurred and proportionate to the end to be achieved; (b) the court should require them to explain and justify specifically each aspect of the costs that they sought to recover; (c) the test of reasonableness was whether a prudent man in similar circumstances would have spent his money in the way that the liquidators did; and (d) to this end, the court should appoint an independent assessor to scrutinize the applicants” claims for fees and expenses.

Held, allowing the application:

(1) The court had an inherent equitable jurisdiction to order liquidators” fees and expenses to be paid from trust property held by a company in

liquidation provided such fees and expenses were reasonably incurred in returning the trust property to those beneficially entitled to it. The complex work carried out by the applicants in the present case had been necessarily required and it had been for the benefit all customers. The applicants” skill and labour might not have added directly to the respective value of the underlying custody assets of each trust but, taken as a whole, they doubtlessly added value to the assets in the sense that the work was necessary before any of the assets could have been retrieved for the benefit of the custody asset customers. If the applicants had not done the work, the same tasks would have had to be carried out by someone else, probably a receiver, at similar or greater expense. Furthermore, the applicants were officers of the court, not mere intermeddlers, and were not expected to undertake their work for the benefit of the custody asset customers at their own expense. The costs and expenses strictly referable to the winding up of the company (including the liquidators” remuneration) were payable out of the company”s own assets and not the assets held on trust, but the custody assets were available for the reasonable fees, costs and expenses incurred in sorting out the assets and continuing to manage or administer them (para. 33; paras. 41–48; para. 55; paras. 60–63).

(2) The applicants” proposed method of apportionment would be adopted. Although it was imprecise and imperfect in that it would require some assets which were simple to administer to subsidize others which were more expensive, sharing their fees and expenses between all customers proportionate to the value of their assets was broadly the best way to ensure fairness and equality. It was not an attempt at an exact accounting for the costs of administering the respective custody assets but was, in broad terms, the best that the applicants could do to meet the rule that equality was equity (equality in this sense meaning that the respective custody assets were all allocated the same percentage share of the costs (subject to the 30:70 cash to securities ratio))...