Re Sphinx Group of Companies

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 02 May 2014
• Court: Grand Court (Cayman Islands)
• Date: 02 May 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;

A. Turner and C. Hoffman for the liquidation committee;

D. Dinner for Beus Gilbert;

Ms. S. Dobbyn for hfc Ltd.

G. Cowan for DPM;

Ms. H. Brooks for other interested parties.

Cases cited:

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

(2) Bank of Gibraltar & Malta, ReELR(1865) L.R. 1 Ch. App. 69, applied.

(3) Barrett v. Duckett, [1995] 1 BCLC 243; [1995] BCC 362, referred to.

(4) Cape Breton Co. v. FennELR(1881), 17 Ch. D. 198, applied.

(5) Eros Cinema Pty Ltd. v. NassarFLR(1996), 133 FLR 34; 14 ACLC 1374, referred to.

(6) Euro Bank Corp., In re, 2003 CILR 205, applied.

(7) Fargro Ltd. v. Godfroy, [1986] 1 W.L.R. 1134; [1986] 3 All E.R. 279; (1986), 2 BCC 99167, applied.

(8) Ferguson v. Wallbridge, [1935] 3 D.L.R. 66, referred to.

(9) Foss v. HarbottleENR(1843), 2 Hare 461; 67 E.R. 189, referred to.

(10) Guardian Assur. Co., In re, [1917] 1 Ch. 431, applied.

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

(12) Imperial Bank of China, India & Japan, ReELR(1866) L.R. 1 Ch. App. 339, applied.

(13) International Contract Co., In re, sub. nom.Hankey”s Case(1872), 41 L.J. Ch. 385; 26 L.T. 358, referred to.

(14) N.F.U. Dev. Trust Ltd., In re, [1972] 1 W.L.R. 1548, referred to.

(15) Oceanic Steam Nav. Co. Ltd., In re, [1939] Ch. 41; [1938] 3 All E.R. 740, referred to.

(16) SIIC Medical Science & Technology Ltd., In re, 2003 CILR 355, applied.

(17) Saad Inv. & Fin. Co. Ltd. #5, In re, 2010 (2) CILR 63, referred to.

(18) Savoy Hotel Ltd., In re, [1981] Ch. 351; [1981] 3 W.L.R. 441; [1981] 3 All E.R. 646, applied.

(19) Sovereign Life Assur. Co. v. Dodd, [1892] 2 Q.B. 573, applied.

(20) T & N Ltd. (No. 3), Re, [2007] 1 All E.R. 851; [2007] 1 BCLC 563; [2007] Bus. L.R. 1411; [2006] BPIR 1283; [2006] EWHC 1447 (Ch), referred to.

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

(22) UDL Holdings Ltd., Re, sub nom.UDL Argos Engr. & Heavy Indus.

Co. Ltd. v. Li Oi Lin, [2002] 1 HKC 172; [2001] H.K.C.F.A.R. 358, applied.

Legislation construed:

Companies Law (2013 Revision), s.86(1): The relevant terms of this sub-section are set out at para. 4.

Companies Winding Up Rules 2008, O.9, r.1(1): The relevant terms of this sub-rule are set out at para. 51.

Companies-arrangements and reconstructions-‘compromise or arrangement’-no specific legal definition and words not to place limitations on each other-may include most forms of legal transaction if element of ‘give and take’ for both sides and receives necessary approval-cannot involve total surrender or confiscation of assets, but no requirement that beneficial to all parties

Companies-arrangements and reconstructions-confirmation by court-may confirm scheme proposed by creditor provided liquidators approve it, even if petition raised by proposing member

Companies-arrangements and reconstructions-confirmation by court-may confirm scheme departing from statutory regime, even if involves creditor suing on behalf of company-may authorize party with interest in liquidation to sue in company”s name if liquidators refuse to sue or consent to it doing so-may find that creditor has sufficient standing to sue in own name if necessary

The petitioners petitioned for an order to reconvene court meetings to hold a vote to amend the 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 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 petitioners submitted that (a) although a scheme would usually be submitted by liquidators, they had standing to bring the petition as it was supported by the liquidators; (b) the proposed scheme could be properly regarded as a compromise or arrangement allowing the court to order meetings under the Companies Law (2013 Revision), s.86. Although the arrangement was unusual because it required the liquidators to divulge powers to the petitioners, there was no definition of ‘compromise’ or ‘arrangement’ which precluded this; (c) there was no legal reason why the court could not sanction the arrangement, even though it divulged powers from the liquidators to the petitioners; (d) the court was entitled to sanction a scheme which disbanded the liquidation committee. A liquidation committee was not a mandatory requirement of either the Companies Law or the Companies Winding Up Rules. Further, there was good reason to disband the current liquidation committee as its core roles were assigned to other parties under the amending scheme; and (e) as no creditor”s substantive rights were altered under the new scheme, the classes for the court meetings should not be changed.

The liquidators supported the new scheme and submitted that the court was entitled to implement it even though it was inconsistent with the statutory regime.

Held, granting the petition:

(1) The petitioners were entitled to apply to the court. A scheme of arrangement must sufficiently affect the rights and obligations between a company and its members. It was therefore necessary that the scheme be approved by the company (as represented by the liquidators) and its members or creditors, but this did not require the petition to be made by the company itself. As the liquidators approved of the scheme, the petitioners must have sufficient standing to bring the petition (paras. 7–8).

(2) The proposed scheme was an ‘arrangement’ or ‘compromise’ allowing the court to order meetings under the Companies Law (2013 Revision), s.86. The words ‘compromise or arrangement’ did not have a specific legal definition and did not place any limitations on each other. The court was therefore entitled to regard most forms of legal transaction as either a compromise or an arrangement, provided that there was an element of ‘give and take’ for each side and it received the necessary approval. Neither an arrangement nor a compromise could involve a total surrender or confiscation of assets, although there was no requirement that it actually be beneficial to all parties (which was best determined at the

court meetings by the parties themselves). The amended scheme was clearly an arrangement and did not require the liquidators to relinquish all of their statutory powers and duties. There was therefore no reason why the scheme could not be an arrangement or compromise (paras. 11–19).

(3) The court was entitled to sanction the scheme, notwithstanding that it departed from the statutory scheme. The amended scheme did not alter the rights of any investors as amongst themselves and there was authority for the proposition that the court could sanction a scheme which differed from the statutory scheme (although the court should be careful before doing so). The most significant difference with the proposed scheme was that the petitioners would be responsible for the New York litigation. A shareholder would have been entitled to bring a derivative action in SPhinX”s name if it had not entered into liquidation but this would typically be unnecessary after it did so as the liquidators were required to sue directly on behalf of all shareholders. Where, however, the liquidator refused to sue, or consented to another party doing so, it was clear that the court had authority to authorize any person with a proven interest in the liquidation to pursue a claim in the company”s name if they provided the necessary indemnity to the company. As the scheme merely required the petitioners to have control of the existing litigation, which would continue in the liquidators” names, there was no need for the court to find that they would have substantive standing to sue themselves, although it would have been entitled to do so if necessary (paras. 26–29; para. 34; paras. 41–48).

(4) The court was able to sanction a scheme which disbanded the liquidation committee. The Companies Winding Up Rules, O.9, r.1 gave the court discretion to refuse to establish a liquidation committee. This was a flexible discretion and must include the ability to disband it-although it could only be used having due regard to the interests and wishes of the interested parties. As the proposed scheme required the scheme committee to discharge functions which would otherwise be expected of the liquidation committee and imposed fiduciary duties and duties of confidentiality, skill and care, there was no reason not to disband the committee (paras. 51–56; paras. 60–61).

(5) A class was defined by the relationship which its members had with the company, rather than the rights which they held privately or as amongst each other. The classic test for determining whether parties should be divided into classes was whether the rights of those affected by the scheme were such that the scheme should be viewed as a single arrangement or as a number of linked arrangements. Each member of a class must therefore have sufficiently similar interests in the liquidation that they...