Re Sphinx Group of Companies

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 10 June 2014
• Court: Grand Court (Cayman Islands)
• Date: 10 June 2014

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF THE SPHINX GROUP OF COMPANIES

Ms. C. Bryant, Q.C., T.W.G. Lowe, Q.C., and Ms. C.J. Bridges for the joint official liquidators;

Ms. F. Toube, Q.C., A. Galatopoulos and M. Kish for the petitioners;

Ms. A. Dunsby for the liquidation committee;

D. Dinner for Beus Gilbert;

Ms. S. Dobbyn for hfc Ltd.

G. Cowan for DPM;

B. Hobden for other interested parties.

Cases cited:

(1) Anglo American Ins. Ltd., Re, [2001] 1 BCLC 755, applied.

(2) Ayala Holdings Ltd. (No. 2), Re, [1996] 1 BCLC 467, applied.

(3) Bank of Credit & Comm. Intl. S.A. (No. 3), Re, [1993] BCLC 1490; [1992] BCC 715, applied.

(4) English, Scottish & Australian Chartered Bank, In re, [1893] 3 Ch. 385, dicta of Lindley L.J. applied.

(5) Equitable Life Assur. Socy., Re, [2002] 2 BCLC 510; [2002] BCC 319; [2002] All E.R. (D.) 109; [2001] BPIR 172; [2002] EWHC 140 (Ch), applied.

(6) Hawk Ins. Ltd., Re, [2001] 2 BCLC 480; [2002] BCC 300; [2001] EWCA Civ 241, applied.

(7) ICP Strategic Credit Income Fund Ltd., In re, 2014 (1) CILR 314, distinguished.

(8) Kempe v. Ambassador Ins. Co., [1998] 1 W.L.R. 271; [1998] 1 BCLC 234; [1998] BCC 311, applied.

(9) National Bank Ltd., In re, [1966] 1 W.L.R. 819; [1966] 1 All E.R. 1006, applied.

(10) Telewest Comms. Plc (No. 1), Re, [2005] 1 BCLC 752; [2005] BCC 29; [2004] EWCA Civ 728, applied.

(11) Trix, In re, [1970] 1 W.L.R. 1421; [1970] 3 All E.R. 397, applied.

Legislation construed:

Companies Law (2013 Revision), s.86(2). The relevant terms of this sub-section are set out at para. 1.

Companies-arrangements and reconstructions-confirmation by court-may sanction scheme if scheme claimants summoned to court meetings in accordance with court order; scheme approved by majority of those voting at meetings; and intelligent, honest man acting in respect of his interest might reasonably approve of scheme-intelligent, honest man likely to approve if scheme accepted by creditors acting on sufficient information with enough time to consider their position and scheme sensible compromise allowing liquidation to progress efficiently

Companies-arrangements and reconstructions-confirmation by court-may sanction scheme which departs from statutory regime-may replace substantial element of insolvency regime with alternative arrangement if approved by parties with economic interest under process prescribed by law-scheme may reassign liquidators” powers even though liquidators unable to do so unilaterally

The petitioners petitioned for sanction of a scheme of arrangement.

The SPhinX group of companies went into liquidation and the court sanctioned a scheme of arrangement. The petitioners, however, did not agree with this scheme and believed that the joint official liquidators were mishandling certain litigation in New York. They therefore filed an application for their removal. Before the application was heard, the petitioners and the liquidators agreed upon a compromise scheme, which the petitioners proposed to the court. This amended scheme required, inter alia, the liquidation committee to be disbanded and a scheme committee be established, and the liquidators to relinquish their position as scheme supervisors to the petitioners (although the liquidators would remain in office) and to allow the petitioners to control the New York litigation (although it would be continued in the liquidators” names).

The Grand Court (Smellie, C.J.) (in proceedings reported at 2014 (2) CILR 131) found that it was capable of sanctioning the proposed scheme and ordered the convening of court meetings for each class. The liquidators held these meetings, each of which obtained high attendance, and the amended scheme was unanimously approved in each meeting.

The petitioners submitted that, as the scheme had been unanimously approved, the court should therefore grant its sanction. The scheme was such that an intelligent, honest man acting in respect of his interests would reasonably approve of it. Although the scheme departed from the principles of the insolvency regime prescribed in the Companies Law (2013 Revision), this did not prevent the court from sanctioning it.

Held, sanctioning the scheme:

(1) The court was able to sanction the scheme. A scheme would be sanctioned if the court were satisfied that (a) the scheme claimants had been summoned to court meetings which had been held in accordance with its order; (b) the scheme had been approved by the required majority of those who voted at the meetings; and (c) the scheme was such that an intelligent, honest man acting in respect of his interest might reasonably approve. It was clear that the meetings had been convened in accordance with the court”s order and that the required majority had approved the scheme. Further, the majority of creditors had voted for the scheme and the court would normally accept that creditors, acting on sufficient information and having enough time to consider their position, were the best judge of what was in their commercial interests. This was particularly persuasive as the expression of approval was unanimous. Moreover, the scheme was a sensible compromise between the liquidators and the petitioners for the liquidation to progress efficiently. The scheme was therefore such that an intelligent, honest man acting in respect of his interests would approve and could be sanctioned (paras. 4–8; paras. 12–15).

(2) The court would grant its sanction, notwithstanding that the scheme departed from the statutory regime. Although this question had been considered by the court when determining whether to order court meetings, the question of jurisdiction to sanction should be considered at every stage until the actual point of sanction. It was clear that the court was entitled to grant sanction for an arrangement which varied the statutory scheme, as it commonly approved schemes which varied the distribution from the statutory insolvency regime. Moreover, there was clear authority for the proposition that the court could sanction a scheme which replaced a substantial element of the insolvency regime with an alternative arrangement, provided that the scheme was approved by those with an economic interest in the liquidation under the process prescribed by law. This was distinct from the principle that a liquidator could not unilaterally assign his or her powers to a third party as the transfer could only be made if approved by the company”s creditors and the court. Further, as the liquidators were unable to assign their abilities, it was important that the court was able to approve a scheme whereby those powers were transferred (para. 17; para. 21; para. 29; paras. 39–41; paras. 47–48).

1 SMELLIE, C.J.: The order directing the convening of court meetings having been made on May 2nd, 2014 under s.86(1) of the Companies Law (2013 Revision) and the meetings convened, I am now invited to sanction the amendment scheme. [The circumstances leading up to, and details of, the amended scheme are detailed more fully in the previous decision of the court (reported at 2014 (2) CILR 131)]. The prerequisites of the jurisdiction to sanction a scheme of arrangements are set out under s.86(2) as follows:

‘If a majority in number representing seventy-five per cent in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be

binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, where a company is in the course of being wound up, on the liquidator and contributories of the company.’

2 This court”s approach to the process described by s.86 follows the same three-stage process as under the equivalent legislation in England, that which was summarized by Chadwick, L.J. in Re Hawk Ins. Co. Ltd. (6) ([2001] 2 BCLC 480, at paras. 11–12) as follows:

‘There are . . . three stages in the process by which a compromise or arrangement becomes binding on the company and all its creditors (or all those creditors within the class of...