Re Universal & Surety Company Ltd

• Jurisdiction: Cayman Islands
• Judge: (Malone, C.J.)
• Judgment Date: 25 August 1992
• Court: Grand Court (Cayman Islands)
• Date: 25 August 1992

Grand Court

(Malone, C.J.)

IN THE MATTER OF UNIVERSAL AND SURETY COMPANY LIMITED

A. Jones for the official liquidator;

P. Lamontagne, Q.C. and G. Ritchie for the creditor.

Cases cited:

(1) Cenco Inc. v. Siedman & Siedman, 686 F. 2d 449 (1982).

(2) Leon v. York-o-Matic Ltd., [1966] 1 W.L.R. 1450; [1966] 3 All E.R. 277, dictum of Plowman J. applied.

(3) Palmer Marine Surveys Ltd., In re, [1986] 1 W.L.R. 573, dictum of Hoffmann J. applied.

(4) Schact v. Brown, 711 F. 2d 1343 (1983).

Companies-liquidators-powers and duties-settlement of litigation-liquidator acting reasonably and bona fide not automatically entitled to court”s sanction of proposed settlement-court to consider settlement in context of insolvency law principles, financial consequences to liquidator and creditors, other options, creditor”s wishes and liquidator”s assessment of those wishes-if suit by liquidator likely to fail, court may approve his acceptance of settlement covering expenses and fees though small fraction of value of suit as payment of liquidator”s remuneration has priority

The official liquidator brought proceedings against the auditors of a company in compulsory liquidation.

The company went into compulsory liquidation after sustaining substantial losses allegedly caused by the negligence of its Florida-based auditors. The official liquidator obtained judgment against the auditors in the Circuit Court for Dade County in the sum of US$15.7m. The judgment was unanimously set aside in the Florida Court of Appeal and the official liquidator then appealed to the Full Court of Appeal to have the original judgment reinstated. Pending that appeal, the auditors offered in final settlement to pay US$450,000 and to waive the order for costs in their favour, in consideration of the official liquidator”s withdrawing his appeal.

In the present proceedings the official liquidator applied for a direction that he be authorized to accept the offer. The application was opposed by a creditor of the company and a contributor to the loan fund set up to meet the costs of the legal proceedings but which, at the time of the application, had all been spent. At the hearing expert evidence was tendered which suggested that the Florida appeal had very little chance of success.

The official liquidator submitted that (a) he was entitled to the sanction of the court unless he was acting ultra vires, fraudulently, improperly, or in a way that no reasonable liquidator would act; (b) the court should not exercise his discretion for him but should consider the correctness or otherwise of his decision in the light of all the evidence he had or ought to have taken into account; and (c) since he stood to lose both his out-of-pocket expenses and his fees if the appeal were to fail and since he was under no obligation to work without remuneration or to finance the liquidation, it was entirely reasonable that he should accept the offer.

The creditor submitted in reply that (a) the court should look at the proposed settlement to see if it were reasonable for the official liquidator to give up an asset of the company. If the settlement were reasonable the court should sanction it, otherwise it should not, even though it could not be said that no reasonable liquidator would have accepted it; and (b) it would in fact be unreasonable to accept the offer, since the amount was so substantially less than the award expected if the appeal were to be successful, and especially since there was no certainty that the appeal would fail.

Held, granting the application:

(1) The official liquidator, acting reasonably, bona fide and within his powers, was not automatically entitled to the court”s sanction of a proposal for the final settlement of the proceedings against the wishes of the creditors. The court should first take account of all the relevant evidence, which in this case was (a) evidence of whether there was a reasonable chance of success in the appeal; (b) evidence from which a reasonable assessment could be made of the financial consequences to the liquidator and the creditors; and (c) evidence of the wishes of the creditors and how far they had been taken into account by the liquidator. The court should not exercise the liquidator”s discretion for him but should rather consider the correctness or otherwise of his decision, having regard to the general principles of fairness and commercial morality to be found in insolvency law as applied to companies (page 152, lines 24–29;page 152, line 41 – page 153, line 16).

(2) Despite the fact that the settlement offer was less than 3% of the value of the judgment obtained in the lower court, the liquidator had good reason to accept the offer since that would at least assure him of covering his expenses and these were his first charge in order of priority. Should he reject the offer and lose the appeal, he would lose both his out-of-pocket expenses and his fees, and it was unacceptable that he should be faced with the prospect of having to work without remuneration, or use his own resources to finance the liquidation. The creditors, on the other hand, would have nothing to gain or lose by accepting the offer, or by rejecting it and losing the appeal. It was acknowledged that they had everything to gain if the appeal were successful, but since the court accepted the expert evidence that the appeal was likely to fail, it was reasonable for the liquidator to refuse to take the risk and to secure what he could at this stage. Despite the conflict of interest facing the liquidator, he would be acting bona fide and within his powers if he accepted the offer, and the court would accordingly authorize him to accept it (page 155, lines 20–37;page 155, line 41 – page 156, line 31).

MALONE, C.J.: This is an application by the official liquidator

of Universal Casualty & Surety Co. Ltd. (‘the company’)

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