The Companies Law (2013 Revision) the Sphinx Group of Companies in Official Liquidation)
| Jurisdiction | Cayman Islands |
| Judge | Chief Justice |
| Judgment Date | 10 June 2014 |
| Judgment citation (vLex) | [2014] CIGC J0723-2 |
| Docket Number | FSD 21 OF2014ASCT. |
| Court | Grand Court (Cayman Islands) |
| Date | 10 June 2014 |
In Chambers
The Hon. Chief Justice
Ms. Ceri Bryant QC and Mr. Thomas Lowe QC instructed by Ms Cherry Bridges of Ritch and Conolly, Attomeys-at-Law for the Joint Official Liquidators (‘JOLs’) of the SPhinX Group of Companies.
Ms. Felicity Toube QC instructed by Mr. Aristos Galatopoulos and Mr. Marc Kish of Maples and Calder, Attomeys-at-Law for the Petitioners.
Mr. Alan Turner and Ms. Charlotte Hoffman of Turners, Attomeys-at-Law for the Liquidation Committee; (appearing at the convening hearing); and Ms. Andrea Dunsby of Turners appearing alone at the sanction hearing).
Mr. David Dinner of Dinner Martin, Attomeys-at-Law for Beus Gilbert (appearing at both hearings);
Ms. Sarah Dobbyn, Attorney-at-Law of Sinclairs for hfc Ltd. (appearing on a watching brief only at both hearings);
Mr. Guy Cowan of Campbells for DPM (appearing on a limited watching brief only at both hearings);
Ms. Hilary Brooks (appearing at the convening hearing) and Mr. Ben Hobden (at the sanction hearing) both of Conyers Dill & Pearman; (both appearing on a watching brief only for other interested parties);
Proposed amendments to existing scheme of arrangement — whether court has jurisdiction to sanction where scheme (as amended) would involve liquidators relinquishing certain fiduciary powers to scheme supervisors — whether amendment scheme would involve an impermissible departure from the statutory liquidation regime.
The SPhinX Group of companies has been in liquidation since 2006, and on 22 November 2013, a Scheme of Arrangement for the compromise of investor claims was sanctioned by this Court (‘the Original Scheme 1’).
There is now a proposal to amend the Original Scheme and the immediate question is whether the Court should direct the convening of meetings of shareholders for the consideration of the proposed Amendment Scheme. The Amendment Scheme is proposed by certain investors who hold a very significant percentage of the shares in the SPhinX Group and who, for reasons they would wish to present to the Court if the Amendment Scheme does not proceed, have filed an application for the removal of the JOLs (‘Removal Application’). If approved, the Amendment Scheme would avoid the need for a decision of the Court on the removal of the JOLs, as it would propose a compromise in terms which are discussed below.
Four questions, described as jurisdictional or quasi-jurisdictional in nature, have arisen and been identified for resolution now and about which I must be satisfied before I might direct the convening of meetings for consideration of the Amendment Scheme. As some of the issues to be compromised under the
Amendment Scheme would operate to alter the effect of the insolvency regime as imposed by the Companies Law (2013 Revision), (‘the Law’); the issue ultimately becomes whether the court has jurisdiction to sanction a scheme that departs from the principles of that regime. This judgment seeks to resolve these questions of jurisdiction.The first question is whether those proposing the Amendment Scheme, ‘the Petitioners’— as opposed to only the JOLs — have standing to apply to the Court for the convening of the meetings at which the Amendment Scheme would be considered (‘Court Meetings’). Their application must meet with the requirements of section 86(1) of the Law which governs the subject and which provides:
‘ Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the Court may, on the application of the company or of any creditor or member of the company, or where a company is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the Court directs,’
As mentioned above, the Petitioners have, since filing their Removal Application, come to the terms of a compromise with the JOLs which would avoid the need for their Removal Application to be heard and they seek to give effect to the terms of the compromise by way of the Amendment Scheme. Thus, although the Amendment Scheme and the present application for the direction of meetings have the full support of the JOLs, strictly speaking the present application is brought not by the JOLs, but by the Petitioners. On the face of the wording in section 86 (1), it would seem that where a company is being wound up the Court may direct the convening of a scheme meeting only ‘on the application …of the liquidators’. No reference is made to a power to direct Court meetings on the application of a creditor or member where a company is already being wound up, as here.
I am however satisfied, on the authority of case law — Re Savoy Hotel Ltd. [1981] I Ch. 351 in particular — that as the present application has the essential support of the JOLs speaking on behalf of the SPhinX companies themselves, the Petitioners in their capacity as investors (whether in actuality to be regarded as shareholders or creditors) do have standing to apply to the Court to convene meetings at which all investors will be asked to consider the Amendment Scheme.
As was explained by Nourse J (as he then was) in Re Savoy Hotel, the rights and obligations existing between the company and its members (or creditors as the case might be) must be ‘sufficiently affected’ by a proposed scheme for it to constitute an ‘arrangement between the company’ and its creditors (or members) for the purposes of section 86 of the Law 2. Further, that the approval of the company of the scheme of arrangement is therefore essential and, therefore, the Court would have no jurisdiction to sanction the proposed scheme without such approval 3. Here, the company being in liquidation, the approval of the JOLs as the representatives of the company is what is required. This is also as section 86(1) itself recognises.
Thus, the JOLs” approval of the proposed Amendment Scheme, speaking on behalf of the SPhinX Companies themselves, in my view addresses concerns about the standing of the proponents to invoke the jurisdiction of the Court towards the same ends. The jurisdiction of the Court to convene Court Meetings for the consideration of the Amendment Scheme is properly invoked by the approval of the JOLs on behalf of the SPhinX Companies, even though the JOLs are not themselves the applicants for the convening of the meetings.
The second question is whether the proposed Amendment Scheme may properly be regarded as ‘a compromise or arrangement’ between the SPhinX Companies and the would-be Scheme participants within the meaning of section 86 of the Law.
I hold that it is clear enough that there is an issue to be compromised as to whether the JOLs should be removed and there is an arrangement (by way of the Amendment Scheme itself) to be put in place by which the compromise would be effected.
It must be recognized in this context, though, that the nature of the arrangement would be unusual as it would require the JOLs to cede certain of their important fiduciary responsibilities to Scheme Supervisors as more fully explained below. Nonetheless, the Courts have never sought categorically to define the term ‘ compromise or arrangement’ and the two concepts are not to be regarded simply as being synonymous.
As long ago as 1917, in Re Guardian Ass. Co.4 the English Court of Appeal declared as follows, per Laurence LJ:
‘ I do not think that there is any sufficient ground for limiting the meaning of the word ‘arrangement’ in this section. To my mind, any risk is sufficiently guarded against by the fact that the sanction of the court must be obtained. This section is not meant to be limited merely to a compromise; it is to apply also to something that is an arrangement. This proposal seems fairly to come within the word ‘arrangement’ and I do not see any object in limiting its meaning so as to exclude a scheme which is admittedly beneficial to ail parties concerned.’
This principle has been reaffirmed in more recent cases before this Court and the English Courts. In SIIC Medical Science and Technology (Group) Limited 5, Levers J stated at paragraph 12:
‘ The courts have construed ‘arrangement’ as a word of very wide import, covering almost every, type of legal transaction so long as there is some element of give and take and it has the approval of the company concerned, either through its board or through the members in a general meeting.’
Levers J was there reflecting upon the earlier observations of Brightman J. from Re NFU Development Trust Limited6 to the same effect, where he observed that a compromise implies some element of accommodation on each side and that an arrangement implies some element of give and take. Total surrender or confiscation was not within either of them. For that reason, Brightman J. held that the proposed scheme in that case which did no more than expropriate the interest of a member or creditor would not be a compromise or arrangement.
In commenting on this decision in Re Savoy Hotel (above) Nourse J. held 7 that the word ‘arrangement’ is one of very wide import, a proposition which was by no means diminished by Brightman J's judgment: ‘ All that that case shows is that there must be some element of give and take. Beyond that, it is not necessary nor desirable to attempt a definition of arrangement’.
In Re SPhinX Group 2010(1) CILR 452, this court affirmed its jurisdiction to sanction a scheme of arrangement 8 on the basis that it involved essential ‘give and take’ between the companies and their creditors/members,...
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