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Mind the gap: clarifying the scope of sanction applications

A recent decision of Mr Justice Doyle has provided welcome guidance in relation to the scope and extent of sanction applications brought by official liquidators. In a judgment handed down on 3 November 2022 in the matter of Ascentra Holdings, Inc. (in Official Liquidation), the Grand Court has confirmed that it has jurisdiction pursuant to section 110 of the Companies Act (2022 Revision) (the “Act”) to entertain sanction applications made by official liquidators for directions in relation to the exercise of their powers. Although the issue had been previously addressed by Segal J in first instance in Re Direct Lending Income Feeder Fund Inc (FSD unreported judgment of 9 May 2022) (“Re Direct Lending”) that application was not the subject of argument before the Court. The Court’s decision in Re Ascentra confirms, for the first time, that this is an appropriate route for official liquidators to take and, further, that the Court may, in appropriate circumstances, give directions to official liquidators within the context of a sanction application even where those directions may determine parties’ substantive rights.

Background

The application in question had arisen as a result of a dispute between the joint official liquidators (“JOLs”) of Ascentra Holdings, Inc. (in Official Liquidation) (the “Company”) and a third party, Shang Peng Gao Ke, Inc. SEZC (“SPGK”) regarding the ownership of approximately US$11 million in funds (the “Funds”) which were, as at the commencement of the Company’s liquidation, held by a third party in a US bank account. In the circumstances, it was agreed that the Funds would be transferred to a liquidation account, to be held in escrow pending the resolution of the dispute with SPGK.

When the dispute with SPGK could not be resolved through correspondence, the JOLs issued a summons (the “Summons”) pursuant to Order 11 of the Companies Winding-up Rules, 2018 (the “CWR”). The Summons sought orders and directions that the JOLs be authorised to treat the Funds as unencumbered assets of the Company, pursuant to section 110(2) of the Act and paragraph 7 of Part I of Schedule 3 of the Act (“Schedule 3”), and/or that the JOLs be authorised to take possession, collect and/or get in the Funds, pursuant to paragraph 1 and/or paragraph 7 of Part II of Schedule 3.

Schedule 3 sets out the powers exercisable by official liquidators; the powers under Part 1 of Schedule 3 require the sanction of the Court, whilst the powers under Part II of Schedule 3 may be exercised with or without Court sanction. Paragraph 7 of Part 1 of Schedule 3 grants official liquidators the power to deal with all questions in any way relating to or affecting the assets of the company, insofar as sanctioned by the Court. Paragraphs 1 and 7 of Part II of Schedule 3 grant official liquidators the power to take possession of, collect and get in the property of the company and for that purpose to take all such proceedings as the liquidators consider necessary, and to do all other things incidental to the exercise of such power.

It was (initially, at least) common ground between the parties that the Court had jurisdiction to hear the Summons and, if deemed appropriate, make the orders sought. However, SPGK argued that the determination of the Summons would materially affect its substantive rights and that, as such, it was inappropriate for the matter to be dealt with in the context of a sanction application; instead, it submitted that directions should be given for the application to be treated as a full inter partes action, with formal pleadings, discovery and cross-examination. Nevertheless, at the outset of the hearing, the question of whether the Court had jurisdiction to entertain the Summons was raised Doyle J, and SPGK then “somewhat opportunistically” adopted the position that the Court had no such jurisdiction.

A Statutory Lacuna

Mr Justice Doyle identified that, although the Act includes an express provision which allows voluntary liquidators to apply to the Court with any general query in relation to the voluntary liquidation and the exercise of his/her powers, there is no corresponding provision for official liquidators. Section 129 of the Act allows a voluntary liquidator to make an application to the Court to “determine any question arising in the voluntary winding up of a company or to exercise … all or any of the powers which the Court might exercise if the company were being wound up under the supervision of the Court”. If the Court is satisfied (on such an application) that the determination of the question or the exercise of power is just and beneficial, it may accede to the application on such terms and conditions as it deems appropriate (section 129(2) of the Act). Curiously, however, there is no equivalent provision for official liquidations.

Doyle J also noted that Order 11, rule 3 provides that a Court may direct that, when a sanction application gives rise to an issue in respect of substantive rights as between the company and any creditor or contributory (or any class thereof), the application shall be adjudicated as an inter partes proceeding, for which purpose the court may give directions.

The Court’s Decision

Having conducted a detailed review of Cayman, English and Australian authorities, Doyle J ultimately concluded that, despite the lack of a statutory equivalent to section 129 of the Act, the Grand Court does have jurisdiction to entertain sanction applications for directions by official liquidators in the context of section 110 of the Act. Doyle J based his decision on Segal J’s judgment in Re Direct Lending, in which Segal J noted that although there is “no explicit power to seek directions [in the Cayman Islands] as there is in the UK Insolvency Act 1986 (see section 112(1) …), an application for an order seeking sanction for the exercise of (and permission to exercise) their powers is, as a matter of practice, referred to as an application for directions in this jurisdiction.” Support for Segal J’s conclusion in Re Direct Lending could also be found in Kawaley J’s judgment Re Polarcus Limited (in Official Liquidation) FSD 31 of 2021, 6 July 2022 (“Polarcus”), in which he said: “Official liquidators, creditors and/or contributories are entitled to have the court determine whether the proposed exercise of a liquidator’s powers is legally permissible or not.”

Although there is no statute or common law rule by which a court is bound to follow the decision of another court of co-ordinate jurisdiction, Doyle J followed the approach taken by Cresswell J in Re Alibaba.com Limited (2012 (1) CILR 272), Mangatal J in China Shanshui Cement Group Limited (2015 (2) CILR 255) and Parker J in Padma Fund[1] where the Grand Court endorsed the general practice that has been adopted by the courts of England and Wales whereby courts of coordinate jurisdiction will ordinarily follow previous decisions unless convinced that they are wrong. Having regard to that principle, Doyle J decided that he should follow both Re Direct Lending and Polarcus in the interest of judicial comity and certainty in circumstances where he did not consider those decisions to be “plainly wrong”. The Honourable Judge found that, although not ideal, section 110 of the Act plainly places the exercise of the powers of an official liquidator under the control of the Court, and that (in that context) the Court has jurisdiction to entertain sanction applications for directions. As the Summons concerned the assets or potential assets of the Company, the Court’s jurisdiction was properly engaged.

In addition, the Court did not find SPGK’s arguments that a full inter partes action was required convincing. The Honourable Judge placed significance on the fact that, prior to the date of the hearing, SPGK had agreed directions and various consent orders but had not applied for additional pleadings, specific discovery or cross-examination.  Doyle J did not consider that SPGK would be prejudiced by any determination on the Summons in light of the two-day hearing in which SPGK had a full opportunity to put in relevant evidence and submissions. He found that any further delay in determining the issues would be contrary to the overriding objective.

Doyle J’s finding cleared the way for a determination on the merits of the Summons, which concerned a simple question of interpretation of the terms of a Deed, and which was decided in the JOLs’ favour.

Conclusion

The decision in Re Ascentra will provide comfort and reassurance to official liquidators; not only does it confirm that the Grand Court does indeed have jurisdiction to hear a sanction application for directions as to how official liquidators should exercise their powers, it also confirms that such questions may extend to issues which will result in the determination of substantive rights, provided (it appears) that the relevant parties have had a sufficient opportunity to be heard.

Campbells represents the JOLs of the Company.

 [1] Unreported judgment dated 8 October 2021.
Guy Cowen - Senior Associate, Campbells Grand Cayman - Insolvency & Restructuring

Guy Cowan

Counsel
+1 345 914 5876

Nienke Lillington

Senior Associate
+1 345 914 6920