Scotiabank (CI) Ltd v Treasure Island Resort (Cayman) Ltd

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 08 June 2005
• Court: Grand Court (Cayman Islands)
• Date: 08 June 2005

Grand Court

(Smellie, C.J.)

SCOTIABANK (CAYMAN ISLANDS) LIMITED

and

TREASURE ISLAND RESORT (CAYMAN) LIMITED

W.A. Sykes for the plaintiff.

The receiver appeared in person.

Cases cited:

(1) Barn Crown Ltd., In re, WLR[1995] 1 W.L.R. 147; [1994] 4 All E.R. 42; [1994] BCC 381; [1994] BCLC 186, referred to.

(2) Buchler v. Talbot, [2004] 2 A.C. 298; [2004] 1 All E.R. 1289; [2004] BCLC 281, [2004] UKHL 9, applied.

(3) George Barker (Transport) Ltd. v. Eynon, [1974] 1 W.L.R. 462; [1974] 1 All E.R. 900; [1974] 1 Lloyd”s Rep. 65, applied.

(4) Gough”s Garages Ltd. v. Pugsley, [1930] 1 K.B. 615, followed.

(5) Gray”s Inn Constr. Co. Ltd., In re, [1980] 1 W.L.R. 711; [1980] 1 All E.R. 814, considered.

(6) Hollicourt (Contracts) Ltd. v. Bank of Ireland, [2000] 1 W.L.R. 895; [2000] 2 All E.R. 45; [2000] BCC 237; [2000] 1 BCLC 171, referred to.

(7) Mond v. Hammond Suddards (1994), Palmer”s In Company, Issue 6/95, June 14th, 1995, at 5, referred to.

(8) Paradise Manor Ltd. v. Bank of Nova Scotia, 1984–85 CILR 437, referred to.

(9) Sowman v. David Samuel Trust Ltd., [1978] 1 W.L.R. 22; [1978] 1 All E.R. 616; (1977), 36 P. & C.R. 123, applied.

Legislation construed:

Companies Law (2004 Revision), s.98: The relevant terms of this section are set out at para. 8.

s.156: The relevant terms of this section are set out at para. 8.

s.162(2)(b): The relevant terms of this sub-section are set out at para. 31.

Registered Land Law (2004 Revision), s.37: The relevant terms of this section are set out at para. 15.

s.64: The relevant terms of this section are set out at para. 15.

s.72: The relevant terms of this section are set out at para. 16.

s.75: The relevant terms of this section are set out at para. 17.

s.77: The relevant terms of this section are set out at para. 17.

Companies-compulsory winding up-dispositions and transfers during winding up-disposition of property by receiver under power in statutory charge or debenture when company in liquidation not void under Companies Law (2004 Revision), s.156-charge of property under Registered Land Law gives legal and equitable estate to chargee and only saleable under that Law-property subject to debenture beneficially owned by debenture holder when floating charge crystallizes

Companies-compulsory winding up-dispositions and transfers during winding up–validation by court-if creditor unsecured, improper exercise of discretion under s.156 for court to validate disposition so as to create inequality between unsecured creditors

Companies-compulsory winding up-creditors-priority-employees-under Companies Law (2004 Revision), s.162, if assets insufficient, may give payment of employees” wages priority over charge or debenture-court may authorize inclusion of pension liabilities within priority

Companies-receivers-costs-only costs contemplated by debenture recoverable on application for declaratory relief if not sought due to threat or obstacle from other party

A receiver sought an order declaring that he was authorized to dispose of assets, subject to a debenture and a charge, of a company which would shortly be the subject of a winding-up petition.

The plaintiff bank held security for a loan it had made to the defendant company by way of a charge and a debenture over the company”s assets, which included a hotel. The debenture specified that the floating charge it created over all the assets of the defendant became fixed in the event of default. The defendant defaulted on the loan agreement and in September 2003 the plaintiff, in exercise of powers and rights under its security, appointed a receiver under s.72 of the Registered Land Law, who took possession and control of the hotel.

In March 2005, the receiver obtained, under s.77 of the Registered Land Law, an order permitting sale of the hotel by way of private treaty (varying his power under s.75 to sell by public auction). Subsequently, he

was notified that trade creditors of the company would shortly be presenting a petition for its winding up on the ground that it was unable to pay its debts, and they proposed that the sale of the hotel should be postponed to await their petition, which they anticipated would result in the appointment of a liquidator over all the assets of the defendant.

The receiver therefore applied to clarify his right to dispose of those assets of the company covered by the debenture and charge, and sought (a) an order that the sale approved by the court in March 2005 would not be a ‘disposition’ of the defendant”s property under s.156 of the Companies Law (2004 Revision) and therefore void; (b) alternatively, if it were, it should be authorized and validated by the court-exercising its discretion under the final clause of s.156-as the plaintiff was a secured creditor entitled to first call upon the defendant”s assets; (c) a declaration recognizing the overriding liability for the hotel employees” salaries and pensions with regard to s.162 of the Law; and (d) costs on an indemnity basis in accordance with the terms of the plaintiff”s charge over the property.

Held, confirming the receiver”s right to dispose of assets covered by the debenture and charge:

(1) The plaintiff bank had acquired an overriding statutory legal and beneficial interest in the property, to the extent of the value of the loan, secured by the statutory charge which included the power to appoint a receiver. The power to sell the property became vested in the receiver on his appointment, before the winding up of the company was even mooted and a sale under that power, being controlled by the Registered Land Law, s.37, took precedence over any powers which would arise on the commencement of the winding up. Such a sale during the winding up would not therefore be a ‘disposition’ of the company”s property within the meaning of s.156 of the Companies Law (2004 Revision) and would not be void (paras. 15–18).

(2) The debenture created a separate form of security, under which, when the default occurred, the floating charge crystallized and fixed upon the company”s assets. According to its terms, it gave the receiver an express power to effect disposition of the property and therefore such disposition, executed in the name of and on behalf of the defendant company, would be valid and could properly be accepted for registration even if the company were in liquidation. Section 156 of the Law only avoided dispositions of property that belonged legally and beneficially to the company and, after the appointment of the receiver, the property belonged beneficially to the debenture holder (para. 19; para. 23; para. 27).

(3) If the bank were not in fact a secured creditor relying on assets it controlled by virtue of its debenture and charge, free from competing claims, it would be improper for the court to exempt the assets from all the incidences of liquidation by the exercise of its discretion under s.156,

as it would result in one pre-liquidation creditor being given unjustified preference over others (paras. 34–36).

(4) Section 162 of the Law did, however, give priority to certain preferential liabilities, including wages and salaries but not expressly including pensions, to be paid out of property subject to a charge or debenture where the assets of the company available for payment of general creditors were insufficient to meet the liability. The receiver, in the ‘spirit’ of the section, had undertaken and would be permitted to meet the liabilities for the hotel employees” claims (including pensions)...