In the Cayman Islands, it is axiomatic that an insolvent liquidation is carried out for the benefit of the company’s creditors. But that does not mean that a winding up is a creditors’ democracy. The official liquidator, appointed by and answerable to the court, will exercise their own best judgment as to what needs to be done and how to do it. When creditors disagree with the liquidator, Cayman law relies on a mix of statute, convention, and practice to resolve those disputes.
There is surprisingly little in the Companies Act (2021 Revision) regarding creditors’ voices in a winding up proceeding, although section 115(1) does mandate the court to have regard to their wishes for all matters relating to the liquidation. Along similar lines, section 110 confirms that one of the functions of the official liquidator is to report to the creditors on the affairs of the company and the ongoing winding up, and that creditors may apply to the court with respect to the liquidator’s exercise of their powers. The latter provision allows creditors to bring direct challenges to liquidators and to ask the court to either compel or restrain a particular course of action by the liquidator.
To streamline the process of feeding in creditors’ views, the general rule is that every court-supervised winding up will have a liquidation committee. As representatives of the creditor base, liquidation committees act as a sounding board for, and a watchdog over, the liquidator. The creditors themselves elect the members of the committee from among their own numbers, and the members have a duty to act in the interest of creditors as a whole. The liquidator will usually consult with the committee on all major decisions to be taken in the winding up and must provide regular reports and information on matters that are of concern to the committee. While the relevant rules require the liquidator to convene a committee meeting and provide a report at least once every six months, in practice on an active winding up the liquidator will typically distribute materials and updates to the committee on a more frequent basis and have discussions with members as issues arise.
The liquidation committee plays a key role providing consultation and oversight over both the liquidator’s exercise of their powers and their remuneration. Before the liquidator exercises certain powers that require the approval of the court, such as commencing or settling litigation or selling an asset, they will consult with and seek the approval of the committee. Although the committee’s support is not strictly required for the court to approve the course of action proposed by the liquidator, the committee’s views will carry significant weight with the court because, as recently noted by Kawaley J in In re Herald Fund SPC (Grand Court, 1 April 2021), “it is a general principle of company law that those interested in a company are generally the best judges of where their best interests lie”.
On the liquidator’s remuneration, at first instance the committee and the liquidator are required to negotiate and agree on a remuneration agreement that sets out the basis upon which the liquidator will be remunerated. If an agreement cannot be reached, the liquidator must apply to the court for approval of the proposed arrangement. Secondly, the committee reviews all requests for fee approvals by the liquidator. If the committee does not approve of the fees incurred, the liquidator may still ask the court to approve them but reasonable concerns expressed by the committee will typically be considered by the court and in at least one judgment, the Grand Court has expressed the view that in those cases the liquidator bears the burden of proving that their requested remuneration is reasonable.
However, while creditors have various avenues available to put forward their views and influence the actions of the liquidator, ultimately the liquidator is the responsible party and the court will generally defer to their commercial judgment. There is a recognition that creditors’ views as to how the winding up ought to proceed may sometimes be impacted by personal concerns rather than what may objectively be in the best interests of the liquidation as a whole. For that reason, Cayman courts have typically exhibited a reticence to second-guess liquidators when challenged by creditors except in unusual circumstances. Two recent cases from the Grand Court illustrate these principles.
The Herald Fund case mentioned above was one where the Court upheld the liquidators’ complaint that the liquidation committee was trying to micromanage the winding up. The matter came before the Court on an otherwise standard fee approval application by the liquidators, which the committee took as an opportunity to challenge the overall strategy adopted by the liquidators in the winding up by criticising various workstreams that the liquidators had undertaken. In particular, the committee argued that some work done by the liquidators went beyond what the committee had previously approved.
In examining the legal principles and their application, Kawaley J made the following useful observations:
That approach is consistent with the hurdles that creditors will find when challenging a liquidator’s judgment or decisions in court. While Kawaley J’s judgment in Herald Fund championed good working relationships rather than a strict legal focus on who is in charge, the practical reality is that the buck stops with the liquidator who has a fiduciary duty to act in the way they determine is in the best interests of the estate as a whole. In the normal course, it will be very difficult for creditors to convince the court that an honest and good faith liquidator should be overruled.
Difficult, but not impossible. In re Pacific Harbor Asia Fund I, Ltd (Grand Court, 6 May 2020) may be the exception that proves the rule. The liquidators applied to the Court for approval of an asset sale following a bidding process. Various creditors holding a substantial portion of the company’s debt opposed the application. Interestingly however, the major opposing creditors were tightly intertwined in the proposed sale. One was the losing bidder, while another was a potential litigation target of the liquidators for asset recovery efforts. On the liquidator’s side, there were multimillion unpaid fees and expenses that would be paid in full by the completing the proposed sale.
Recognising these influences, McMillan J clearly wrestled in his decision with apparently legitimate concerns raised by the creditors and their personal pecuniary interests that would turn on the outcome, as well as the liquidators’ desire to realise some fee recovery on a challenging mandate. Faced with this balancing exercise, the judge focused on the specifics of the procedure adopted by the liquidators in running the bidding process with a view to ensuring that that process could enjoy the confidence of all interested parties and that the Court could have no reservations or concerns about it. After a detailed review of the facts and the competing affidavit evidence, which was contentious in many places, he expressed concerns with the clarity and transparency of the bidding process, including as to when the process began, an informational imbalance between the two interested bidders, and the rejection by the liquidators of a potentially better offer after the conclusion of the process. On that basis, the liquidators’ application was rejected and the creditors’ challenge accepted.
Pacific Harbor however was undoubtedly an unusual and rare case, and the lengths to which the judge went to assure the readers of his judgment that there was no criticism of the liquidators’ good faith intentions demonstrates the usual principle that the liquidator’s views will be accorded significant weight by the court. It does show however, that the most likely road to successfully challenging a liquidator’s proposed course of action is to focus on procedural issues rather than substantive issues. After all, it is very unlikely that a professional liquidator will not be acting honestly and in good faith with the benefit of legal advice.
Creditors need to recognise these facets of the Cayman liquidation process, particularly if they are more familiar with insolvency proceedings in other jurisdictions that grant a much greater strategic and operational role to creditors. The major takeaway from the recent case law is the need for a constructive and communicative working relationship between creditors and liquidators rather than an adversarial approach. This soft power is often the most effective way for creditors to challenge or otherwise influence the decision-making process before the parties find themselves in front of a judge with heels dug in on all sides. In Herald Fund, Kawaley J called this the “human chemistry” between the key actors. Cultivating those bonds, while keeping in mind the shared interests of all players, will provide the thoughtful and reasonable creditor both credibility and sway in the winding up process.
Mark A. Russell
Mark A. Russell is the Head of Insolvency & Restructuring at KSG, practicing in the areas of insolvency, restructuring, fraud and commercial litigation. Comfortable moving between the boardroom and the courtroom, Mark brings a unique mix of transactional and litigation experience to both contentious and advisory mandates. Mark has acted on most of the biggest insolvency and litigation matters in the Cayman Islands over the last 5 years, including XiO Group, Abraaj, Saad Group, Platinum Partners and Caledonian Bank. He recently appeared as counsel for a US court-appointed receiver, successfully obtaining the first published decision recognizing a foreign receiver’s appointment over a Cayman Islands company. He regularly advises and acts for liquidators, creditors, shareholders and other stakeholders in cross-border and local insolvency, restructuring and litigation matters. He has appeared before the Grand Court of the Cayman Islands and the Cayman Islands Court of Appeal. A team player, Mark works closely with onshore advisers and has provided expert evidence on Cayman law to the United States Bankruptcy Court.