The Companies Law (2018 Revision)

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: Mr. Anthony Smellie
• Judgment Date: 30 September 2019
• Docket Number: CAUSE NO: FSD0015 OF 2010 (ASCJ)

In the Matter of the Companies Law (2018 Revision)

And in the Matter of Saad Investments Company Limited (In Official Liquidation)

Before

THE HON. Mr. Anthony Smellie QC, CHIEF JUSTICE

CAUSE NO: FSD0015 OF 2010 (ASCJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

Liquidators' proposal to compromise a debt by payment despite competing proprietary claims to all the assets of the company — whether debt crystallized when company, as guarantor, commenced winding up — application by liquidators for sanction of the Court to compromise the debt — basis upon which sanction might be given.

[This ruling was handed down in private on 1 May 2019 and has been signed and dated by the judge. The judge gives leave for it to be reported in anonymized form consistent with the order made by the Court dated 1 May 2019 for the summons and all evidence filed in support of it to be sealed and kept confidential pursuant to Order 24, Rule 6 of the Companies Winding Up Rules (2018)].

Appearances:

Ms. Colette Wilkins and Mr. Andrew Gibson of Walkers for the Joint Official Liquidators of Saad Investments Company Limited (in official liquidation)

Mr. Nicholas Fox of Mourant for Ahmad Hamad Algosaibi and Brothers Company

IN CHAMBERS

REASONS

Introduction

1 This ruling relates to the application of the Joint Official Liquidators (“JOLs”) of Saad Investments Company Limited (in official liquidation) (“SICL”) for this Court's sanction that they should, notwithstanding (a) the orders of this Court dated 10 February 2010, 24 October 2013, and 20 July 2018; and (b) Ahmad Hamad Algosaibi and Brothers Company's (“AHAB's”) appeal of the rejection of its proprietary claims against SICL in CICA Civil Appeal No: 15 of 2018, be permitted to cause SICL to enter into a settlement agreement and mutual release between SICL, AB Ltd and XY Ltd (in voluntary liquidation). By this settlement and mutual release, AB Ltd would be paid dividends, in the amount of US$ 17 million, in settlement of its claims proven in both of the liquidations of SICL and of XY Ltd.

Decision

2 I considered the evidence filed by the JOLs, the submissions of Walkers on their behalf, the submissions of Mourant on behalf of AHAB, and decided to grant sanction for the reasons set out following.

Background

3 SICL, together with XY Ltd (its wholly owned subsidiary), owes a contingent liability under a guarantee (the “Guarantee”) provided by them both to AB Ltd for a primary liability due from Saad Trading, Contracting & Financial Services Company (“STCC”) (a Saudi entity) to AB Ltd under a New York law governed promissory note (the “Promissory Note”).

4 Under the terms of the Guarantee, SICL and XY Ltd guaranteed all past, present and future indebtedness under the Promissory Note. The guaranteed liability is for that reason to be regarded as a contingent liability. The quantum of the liability is for US$12 million principal together with a 12% annual interest fee. As the underlying primary obligation was that of STCC and not of SICL, the interest component did not stop running by virtue of SICL's liquidation, and continued to run until STCC's own insolvency process began 1.

5 On 29 December 2009, AB Ltd (through its corporate successor in title) filed a proof of debt in SICL's liquidation for the US$12 million principal together with a 12% annual default interest fee. Taking interest into account, the total debt would be US$23 million.

6 On 20 September 2010, AB Ltd obtained a final and enforceable judgment from the Netherland Antilles Court against XY Ltd, as co-guarantor for payment of the sum of US$12 million plus interest of 12% p.a. as of 14 June 2009, and costs.

7 That judgment having been obtained, an updated proof of debt was filed in the SICL liquidation by AB Ltd on 10 March 2017; SICL being the other co-guarantor.

8 On 26 April 2018, its corporate successor in title assigned and transferred to AB Ltd all of its rights, title and interest in and under the Promissory Note and Guarantee. Hence the claim being now pressed by AB Ltd itself.

Basis of AB Ltd's Claim against SICL

9 In order to determine the quantum of the liability of AB Ltd's claim against SICL, it is necessary to consider whether or not interest can be claimed against SICL as a company in liquidation under Cayman law.

10 Section 139(1) of the Companies Law (2018 Revision) (the “Companies Law”) provides as follows with regard to provable debts in a liquidation:

“All debts payable on a contingency and all claims against the company whether present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company and the official liquidator shall make a just estimate so far as is possible of the value of all such debts or claims as may be subject to any contingency or sound only in damages or which for some other reason do not bear a certain value.”

11 The liability is a contingent debt and is admissible to proof under section 139(1). It is therefore a debt for which the JOLs must make provision.

12 The relevant guaranteed “debt” that is being proved against SICL as co-guarantor in the present case is “principal plus interest”. As a result, this is not a case where there is a debt claimed upon which interest has been accruing after the liquidation of SICL. The interest is an integral part of the secured debt and so Order 16, Rule 11(2) of the CWR, which states in exclusionary terms as follows, has no application to the relevant debt:

“A creditor having a contractual right to interest as against an insolvent company shall not be entitled to prove for any interest accrued after the commencement of the liquidation”

13 As explained above, the relevant debt, including the right to interest (albeit not yet then embodied in a judgment), arose under contract prior to SICL going into liquidation.

14 And further as regards interest, the relevant right to interest which is also secured by the guarantee, arose under the Promissory Note between AB Ltd and STCC.

15 STCC was not in an insolvency process until very recently and therefore, as discussed above, interest continued to run as between STCC and AB Ltd until that event.

16 The secondary liability by way of guarantee between SICL and XY Ltd on the one hand and AB Ltd on the other, mirrors the primary obligation owed to AB Ltd (i.e. the debt of principal and interest secured under the Promissory Note issued by STCC) and therefore the value of the guaranteed claim increased as interest continued to run between STCC and AB Ltd.

17 This is the result when there is a secondary guaranteed liability of a company in liquidation because, as shown above, (i) the specific terms of Order 16, rule 11(2) of the CWR do not apply and (ii) there is coincidence between the primary and secondary liability. See Re Ho Kok Cheong [2000] SGHC 89, where it was held, among other things, that a guaranteed creditor is entitled to contractual interest up to the date of realization of his security and is entitled to prove in the liquidation of the guarantor company for any unrecovered deficit after the realization of the security; applying Re Securitibank Ltd [1980] 2 NZLR 714.

18 Based on the above, the claim against SICL arising from the Guarantee is for a contingent liability on which interest continued to accrue until STCC entered an insolvency process, making SICL as co-guarantor, liable for repayment of the principal and interest covered by the Promissory Note. Thus, as the JOLs admit, making the current total value of the liability at least US$23 million.

19 This is all acknowledged by the JOLs to be the case, on the advice of their lawyers.

The Settlement Agreement

20 The principal terms of the Settlement Agreement are that:

• a. SICL will pay to AB Ltd the sum of US$17 million to discharge the liability of both XY Ltd and SICL, which is admitted as being USD23 million.

• b. AB Ltd will retain its right to pursue STCC for any sum above US$17 million. (This would follow because STCC is not a party to the Settlement Agreement).

• c. SICL (on behalf of itself and XY Ltd its wholly owned subsidiary) will retain the right to pursue STCC for US$17 million by way of subrogation.

21 The Settlement Agreement will be governed by New York law, the same governing law as the Promissory Note and the Guarantee.

The Sanction Application

22 The application brought by the JOLs consists of a sanction application pursuant to Section 110 of the Companies Law and Order 11 of the CWR. The application is necessary for reasons to be explained below, notwithstanding the clear basis explained above, for the admission of the debt.

Section 110 of the Companies Law provides as follows:

• “(1) It is the function of an official liquidator to —

  • (a) collect, realise and distribute the assets of the company to its creditors and, if there is a surplus, to the persons entitled to it; and

  • (b) report to the company's creditors and contributories upon the affairs of the company and the manner in which it has been wound up.

• (2) The official liquidator may —

  • (a) with the sanction of the Court, exercise any of the powers specified in Part I of Schedule 3; and

  • (b) with or without that sanction, exercise any of the general powers specified in Part II of Schedule 3.” [Emphases added.]

23 While the JOLs are required by section 110(1)(a) to distribute the assets to the creditors, this application is necessary because the powers conferred on the JOLs by this Court in the Winding Up Order dated 18 September 2009 made in respect of SICL, do not include the following power which is contained in Part 1 of Schedule 3 to the Companies Law, and therefore the power is exercisable only with the sanction of the Court in keeping with section...