Cayman Islands: Cayman Islands Grand Court Counsel: The Role of Liquidation Committees in Enforcing Costs and Expenses of Liquidators
To print this article, simply register or connect to Mondaq.com.
Following a recent hearing, the Grand Court of the Cayman Islands (the “Large Courtyard“) rendered a notable judgment (the”Judgment“) approving the remuneration of the principal liquidators of the Herald Fund SPC (In Official Liquidation) (“Herald“)1 incurred over a period of six months, the total amount of which had been disputed by the Herald’s Liquidation Committee.
Although compensation claims made by Cayman Islands insolvency office holders are a legal obligation and therefore commonplace before the Grand Court, written decisions about them are rarely rendered and the judgment provides useful guidance on “… the broader question of the extent to which official liquidators are required to seek the approval or tacit support of the liquidation committee when defining the scope of their operational functions and, therefore, of incur liquidation costs and expenses. “ Judge Kawaley’s judgment provides an informative account of the principles underlying the contested compensation claims and will therefore be of interest to insolvency practitioners and their advisers.
Kawaley J reaffirmed and clarified a number of important points regarding the role of a liquidation committee in approving the fees and expenses of liquidators, including, inter alia, that a liquidator committee liquidation at:
- no statutory sanctioning power, including the power to sanction costs and expenses incurred by liquidators (unlike Bermuda’s position in law);
- no explicit statutory role in sanctioning the exercise of the powers of liquidators in the normal course of a liquidation – but has standing to challenge the proposed exercise of the powers of liquidators; and
- a statutory function to assess the reasonableness of the fees and expenses of the liquidators, including the reasonableness of the proposed exercise of the powers of the liquidators so that their statutory role is limited to “… high level approval of work streams coupled with practical business assessment of regular budgets and fee reports …”;
When a liquidation committee does not support or oppose the strategic decisions of liquidators at the operational level, a request eventuala sanction should be considered. In cases where a liquidation committee subsequently objects to the costs and expenses incurred by the liquidators, it will be justified to seek to ensure that the liquidators exercise commercial judgment and not to act independently of the costs. However, it is important to note that the opinion of a liquidation committee as to the reasonableness or not of the costs incurred will not override that of the liquidators when the liquidators have correctly explained their work and responded convincingly to the objections. raised.
Kawaley J’s comments on the assessment of the reasonableness of the fees and expenses incurred by the liquidators in pursuing pending litigation on behalf of the liquidation estate will also be of wider interest. The learned judge observed that while on the one hand, a liquidation committee will naturally want to tighten budgetary controls, on the other hand, caution must be exercised in order not to harm the prospects of the company in the event of a dispute by doing so. . Kawaley J noted that the “… micro – management of complex high value commercial disputes [by a liquidation committee] is only likely to compromise the effectiveness of recovery actions against sophisticated defendants who can be expected to spare no expense in defending such claims. “ The ultimate value of certain actions taken by liquidators in litigation and the associated costs may be impossible to assess simultaneously, and Kawaley J was of the view that “… Official liquidators and their lawyers cannot be judged second on every minor operational judgment they render …”
In deciding whether or not to grant the relief sought by the principal liquidators, Kawaley J. found it useful to take into account the level of the fees and expenses of the principal liquidators incurred in proportion to the total recoveries made in the liquidation to date (approximately 7%), which he considered
“… a powerful indicator that the principal liquidators have established a solid track record of producing returns for investors in a profitable manner …”.
It is obvious that there is a balance to be struck by liquidators taking into account the advice of a liquidation committee, while exercising their own commercial judgment; and as the Judgment specifies, this should ideally take place according to “… a spirit of trust and confidence between the main human actors …”. However, in the circumstances where liquidators often have to make the choice to prefer their own professional business judgment (including appropriate legal advice) and can demonstrate good reason to do so, they will appreciate the reasoned legal support for this position provided by the ‘stop.
1 Walkers acts for the principal liquidators of the Herald Fund SPC (In Official Liquidation).
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.
POPULAR ARTICLES ON: Cayman Islands Litigation, Mediation & Arbitration