The Grand Court has recently provided helpful clarification as to the appropriate test to be applied when a dispute arises over the identity of the insolvency practitioners proposed to be appointed by a creditor or the company. In Global Fidelity Bank Ltd (in Voluntary Liquidation),(1) the Court confirmed the three-stage test for determining independence and that when applying the test, significant weight should be afforded to the creditors' views.
Global Fidelity Bank was placed into voluntary liquidation on 14 June 2021 following an urgent independent financial review and the preparation of a report into the bank's financial position. The bank engaged Michael Pearson and Adam Keenan from FFP to conduct the financial review; on receipt of the report, the bank appointed Pearson and Keenan as voluntary liquidators. In the knowledge that no declaration of solvency would be forthcoming from the bank's directors, the voluntary liquidators made an application to bring the voluntary liquidation under the supervision of the Grand Court under section 124(1) of the Companies Act (2021 Revision), and for themselves to be appointed as the joint official liquidators of the bank. While there was no objection to making a supervision order, one of the bank's largest creditors (the "opposing creditor") objected to the appointment of the voluntary liquidators as joint official liquidators.
The basis of the opposing creditor's objection to the nominated joint official liquidators was the fact that they had been nominated by the directors; the nominees had conducted the bank's initial financial review, prepared the bank's financial report and had subsequently been appointed as the voluntary liquidators. The opposing creditor contended that these prior engagements contravened the independence requirements set out in regulation 6 of the Insolvency Practitioner's Regulations (IPR),(2) creating "an unavoidable and irremediable appearance of partiality towards the directors" and thus disqualifying the voluntary liquidators from being appointed as joint official liquidators. No other creditors expressed opposition to the appointment of the voluntary liquidators; just before the hearing, another significant creditor confirmed in evidence that it did not oppose their appointment.
Following a detailed review of the English and Cayman Islands authorities addressing the requirements of the independence test applicable to insolvency practitioners, Justice Doyle acceded to the application and appointed the voluntary liquidators as joint official liquidators.
Observing that "the issue before the court was not finely balanced", the judge took into account the following considerations when appointing the voluntary liquidators as joint official liquidators:
- The prior connection between the voluntary liquidators and the bank had not lasted long and had not been sufficiently significant to reasonably cast proper doubt on the voluntary liquidators' independence.
- The voluntary liquidators' nomination by the directors and their limited prior involvement did not, as well-regarded professionals, strip them of their actual or perceived independence.
- It was not appropriate to have regard only (or even principally) to the views of one of the bank's significant creditors. While the main focus of the court in an insolvency situation is the views of creditors rather than contributories, the court must also have regard to all of the relevant objective factors that are in play.
- In this case, those objective factors included:
- the limited scope of the prior engagement;
- that the opposing creditor was the only one objecting to the voluntary liquidators' appointment; and
- that the Cayman Islands Monetary Authority had adopted a neutral stance and expressed no concerns in respect of the joint official liquidators' identities.
- The voluntary liquidators' prior engagement may, in instances such as this case, produce some advantage to creditors by way of efficiency and saving costs.
This judgment serves as a useful reminder of the long-standing principles underpinning the appointment of independent insolvency practitioners in the Cayman Islands. Justice Doyle recognised the importance of:
all stakeholders and indeed existing and future internal and external investors worldwide having confidence in the liquidation process of insolvent companies in the Cayman Islands and competent, skilled, cost effective and independent official liquidators have an important role to play in that process and the justifiable confidence placed in it.
In order to maintain this confidence, the Court will have to regard the subjective views of those with an economic stake in the liquidation, within the context of the objective facts and circumstances of the case.
For further information on this topic please contact Gemma Lardner at Ogier's Grand Cayman office by telephone (+1 345 949 9876) or email ([email protected]). Alternatively, contact Aleisha Brown at Ogier's Hong Kong office by telephone (+852 3656 6000) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.
(1) Unreported, Justice Doyle, 20 August 2021.
(2) Regulation 6 of the IPR provides that:
(1) A qualified insolvency practitioner shall not be appointed by the Court as an official liquidator of a company unless he can be properly regarded as independent as regards that company. (2) A qualified insolvency practitioner shall not be regarded as independent if, within a period of 3 years immediately preceding the commencement of the liquidation he, or the firm of which he is a partner or employee, or the company of which he is a director or employee, has acted in relation to the company as its auditor.