Re Liberty Capital Ltd

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J., Sanderson, J. and Henderson, Ag. J.)
• Judgment Date: 20 December 2002
• Court: Grand Court (Cayman Islands)
• Date: 20 December 2002

Grand Court

(Smellie, C.J., Sanderson, J. and Henderson, Ag. J.)

IN THE MATTERS OF LIBERTY CAPITAL LIMITED, INTEGRITY LIMITED, HOLDINGS LIMITED and WATERFORD INSURANCE LIMITED

Ms. S.E. Dobbyn for the liquidators of Liberty Capital Ltd., Integrity Ltd. and Holdings Ltd.;

G.A. Locke for the liquidators of Waterford Insurance Ltd.

Cases cited:

(1) Belyea v. Federal Business Dev. Bank(1983), 46 C.B.R (N.S.) 244; 44 N.B.R. (2d) 248; 116 A.P.R. 248, applied.

(2) Confectionately Yours Inc., In re, Ontario Court of Appeal, C36486, September 19th, 2002, unreported, applied.

(3) Fruit of the Loom, In re, 2000 CILR N–7, referred to.

(4) High Risk Opportunities HUB Fund Ltd., In re, Grand Ct., Cause No. 521 of 1998, September 22nd, 2000, unreported, applied.

(5) Johnson, In re, 1996 CILR N–3; further proceedings, 1997 CILR N–8, referred to.

(6) Tait Intl. Ltd., In re, 2002 CILR N[4], referred to.

Legislation construed:

Companies Law (2002 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 2002), s.107(2): The relevant terms of this sub-section are set out at para. 17.

Companies (Winding-up) Rules 1949 (S.I. 1949/330), r.159(1): The relevant terms of this sub-rule are set out at para. 18.

r.159(2): The relevant terms of this sub-rule are set out at para. 18.

Insolvency Rules 1986 (S.I. 1986/1925), r.4.127(2):

‘The remuneration shall be fixed either-

(a) as a percentage of the value of the assets which are realised or distributed, or of the one value and the other in combination, or

(b) by reference to the time properly given by the insolvency practitioner (as liquidator) and his staff in attending to matters arising in the winding-up.’

r.4.127(4): ‘In arriving at that determination the committee shall have regard to the following matters-

(a) the complexity (or otherwise) of the case;

(b) any respects in which, in connection with the winding-up, there falls on the insolvency practitioner (as liquidator) any responsibility of an exceptional kind or degree;

(c) the effectiveness with which the insolvency practitioner appears to be carrying out, or to have carried out, his duties as liquidator; and

(d) the value and nature of the assets with which the liquidator has to deal.’

Companies-liquidators-remuneration-creditors” committee to approve fees before application for court”s approval-committee to be provided with court”s guideline rates for insolvency work and judgment explaining guidelines-may agree different rates or retain different liquidators-to satisfy itself from liquidators” records that work necessary and time spent reasonable according to court”s criteria-chairman to file affidavit of approval or otherwise

Companies-liquidators-remuneration-court”s guideline fee rates to be applied save in exceptional circumstances-rates calculated according to seniority of staff employed and complexity of task-application for approval of higher rates to be supported by affidavit evidence of costs of insolvency practice in Islands-court to review guidelines periodically according to cost of living, etc.

Companies-liquidators-remuneration-creditors” committee and court require affidavit evidence covering approved criteria in Insolvency Rules,

r.4.127, i.e. time spent, complexity of case, details of exceptional responsibilities, effectiveness of performance, and value and nature of liquidation assets-other factors, e.g. speed and commercial risk, may raise fee level-liquidator to show worked in cost-effective way

Companies-liquidators-remuneration-in liquidation involving parallel foreign proceedings, Grand Court may approve rates in fee protocol approved by foreign court, but unlikely to approve rates equal to or higher than Cayman guideline rates for work performed here unless foreign court considered criteria in Insolvency Rules, r.4.127

The applicants sought their appointment as liquidators in the winding up of four companies, and the court”s approval of their fee scales.

One of the applicants requested the court”s advance approval of its hourly rates for work in three of the liquidations, ranging from US$95 for an administrative assistant to US$450 for a partner in the firm. The other two applicants sought the approval of ‘their customary rates, such fees and expenses to be approved by the court,’ in respect of the fourth liquidation, their customary rates being slightly higher than those of the first applicant.

The Grand Court had expressed concern over the level of fees charged by liquidators in other cases and the lack of evidence submitted to justify the approval of those fees. In 2000, it had met with Cayman insolvency practitioners and informed them of the need for liquidators to provide the court with sufficient information to allow it to assess the reasonableness of hourly rates and overall fees. It had reminded them of the uniquely advantageous position occupied by insolvency practitioners in the Islands. The insolvency practitioners had declined to provide any information showing the cost of carrying on business here, stating that their profitability was a confidential matter. The matter remained unresolved and the Grand Court continued to express concern over requests for approval of significantly increased hourly rates in subsequent cases.

The applicants were appointed as liquidators, and the full court, sitting en banc, heard their application for remuneration. The applicants submitted that (a) in accordance with r.159 of the English Companies (Winding-up) Rules 1949, the court should intervene in the setting of liquidators” fees only on an application challenging remuneration fixed by a creditors” committee; (b) creditors” committees were best placed to determine the appropriateness of liquidators” rates and total fees, since they were well informed and, as the recipients of the proceeds of the winding up, had an interest in minimizing costs; (c) the detailed examination of individual costs bills was an uneconomic use of the court”s and the liquidators” time; (d) it would be inappropriate to set a mandatory fixed scale of fees, and any guidelines should be drafted by reference to fees charged elsewhere, fees previously approved by the Grand Court and fees charged for other accounting and legal services; (e) the court”s intervention was unnecessary since their fees were determined by market forces and were comparable with rates charged in other

financial jurisdictions such as London and New York; and (f) fees should reflect the risk to liquidators of bad debts and professional liability as officers of the court when undertaking insolvency work.

Held, making the following ruling:

(1) Market forces could not be relied upon to ensure reasonable and competitive rates in the Cayman Islands, since almost all the insolvency work from thousands of off-shore companies registered here was performed by just four large accountancy firms. Only a few law firms undertook insolvency work, and those firms frequently used the same accountants, and vice versa. In the absence of competition legislation, the accountancy firms were able to agree what rates to charge, whether to compete for business and when to apply for increased rates (often of the same amount at the same time). Without evidence by which the court could assess the relative costs of doing business abroad and in the Islands, rates quoted from other jurisdictions were unhelpful, since the applicants here did not have to allow for income tax when assessing what rates to charge (paras. 23–24).

(2) It was inappropriate for creditors” committees to determine the reasonableness of liquidators” fees here without guidance from the court, since many Cayman liquidations involved large numbers of small off-shore investors scattered throughout the world, whose individual stake in the liquidation might be too small to warrant taking an active interest in the costs of liquidation, and whose knowledge of insolvency practice was inadequate to allow them to judge the reasonableness of proposed rates. Alternatively, the real creditors might be represented by a large institution such as an investment house which was not itself directly affected by the costs of liquidation and therefore would take a less keen interest in fees than an individual investor. In any event, in cases recently before the court, committees seemed rarely to have been involved in practice, even when the applicants had been directed to seek such approval (paras. 25–27; para. 29).

(3) Consequently, the court was not so inclined to ratify fees set by creditors” committees as it might be if those fees were determined by competitive forces and committees were knowledgeable and well informed. However, in future the court would approve liquidators” fees when they had been approved by a properly-informed committee (or, if appropriate for a small-scale liquidation, a creditors” and shareholders” representative). The committee or representative was to be provided with the court”s guideline schedule of rates for insolvency work (below) and an explanation of how they applied. Higher or lower rates could be agreed with the liquidator, and the committee could obtain quotes from other potential liquidators. The committee would have to satisfy itself by reference to records that the work was necessary and the time spent reasonable, having regard to the criteria listed below. It could retain professionals to advise it if necessary. The chairman of the committee should then file an affidavit with the court stating that the committee had

been provided with a copy of the judgment in these proceedings and whether or not it considered the fees to be reasonable. Approval by the committee under these conditions would carry significant weight with the court, and fees not approved by the committee would be subject to greater scrutiny by the court (para. 28; para. 50; paras. 62–63; para. 67).

(4) The court would set a guideline schedule of fees...