Spotlight: insolvency proceedings in Isle of Man – Lexology

An extract from The Insolvency Review, 7th Edition

Plenary insolvency proceedings

i Appointment of liquidators provisionally without notice pending the hearing of a claim to wind up a company

There have been two applications before the Manx courts for the appointment of provisional liquidators before the hearing of the winding-up claim that have been brought without notice. These applications have been made by the Isle of Man Financial Services Authority (FSA) (formerly the Financial Supervision Commission (FSC)).

In Financial Supervision Commission v. UK Secured Finance Fund PLC, the FSC sought an urgent without notice application pursuant to Section 178 of the Companies Act 1931 for the appointment of provisional joint liquidators in respect of UK Secured Finance Fund Plc.

The court heard that the company in question did not have a registered agent, in breach of Section 74(1) of the Companies Act 2006, and no longer had a manager. As a result of the company having no registered agent, the Registrar of Companies had issued notice under Section 183 of the Companies Act 2006 indicating that, unless cause could be shown to the contrary, the company would be struck off the register. Further, joint controllers had been appointed to the company by the FSC, who had reported that the company was cash-flow insolvent and had recommended to the FSC that the company be placed into liquidation as soon as possible. The FSC noted their belief that it was in the public interest that the company was wound up.

In Isle of Man Financial Services Authority v. New Earth Recycling and Renewables (Infrastructure) PLC and others, the FSA again sought appointment of provisional joint liquidators on a without notice basis.

In that case, the FSA sought appointment of provisional liquidators on the following basis: the companies in question had limited, if any, cash holdings and the directors had indicated that there were insufficient funds to operate day to day or to liquidate in an orderly manner; all payments had been frozen; it was not appropriate to allow the companies to continue trading without sufficient liquidity to operate day to day; and the directors had consented to the applications being made and to the provisional appointments. The FSA also believed that the liquidators could preserve any assets that might still be capable of preservation and make necessary enquiries to obtain information regarding the affairs of the companies.

In both cases the application was granted, despite it being an exceptional step to take. Reference was also made in both cases to the decision of the court in Unicorn Worldwide Holdings Ltd and others v. P Court Ltd and others, which sets out the tests to be applied in the appointment of provisional liquidators without notice.

The Unicorn Worldwide Holdings case, following a number of English and Welsh authorities, states that there is a two-stage test that must be satisfied before such an appointment can be made.

The ‘first and critical question’ is whether the creditor was ‘likely to obtain a winding-up order on the hearing of their petition’. The second discretionary stage is that the court should consider whether, in the circumstances of the case, it is right that the provisional liquidator should be maintained in office pending the hearing of the claim. The judgment in Unicorn Worldwide Holdings states:

Factors that the court should consider include whether there are real questions as to the integrity of the Company’s management and/or as to the quality of the Company’s accounting and record keeping function, whether there is any real risk of dissipation of the Company’s assets and/or any real need to take steps to preserve the same, whether there is any real risk that the company’s books and records will be destroyed and/or any real need for steps to be taken to ensure that they are properly preserved and maintained (which may be so where, for example, there is clear evidence of fraud or almost irrefutable evidence of chaos), whether there is any real need for steps to be taken to facilitate immediate inquiries into the conduct of the Company’s management and affairs and/or to investigate and consider possible claims against directors (e.g. for fraudulent or wrongful trading), whether or not the Company has a realistic prospect of obtaining a validation order under s.127 of the Act (because if it has no such prospect, it may well not be realistically able to trade in any event), and generally which course ‘seems likely to cause the least irremediable prejudice to one party or the other’.

Interestingly, although a provisional liquidator was appointed in both FSC v. UK Secured Finance Fund Plc and FSA v. New Earth Recycling and Renewables (Infrastructure) Plc, the court noted in the latter case that it granted the application with some degree of reluctance as it felt that the risk of dissipation of assets simply was not there. However, the directors of the companies involved had essentially agreed to the FSA’s applications and, as such, the court was satisfied that the grounds were made out. Had the companies’ directors not been agreeable to the applications then it may well have been that the without notice application would not have been granted.

ii Disclosure and specific disclosure in winding-up claims

Requiring disclosure or making an order for specific disclosure in a winding-up claim has been noted as a highly unusual step to take; however, there are two cases in which such orders have been sought. Those applications have not been successful, but the judgments make clear that the court does have the power to order such disclosure in a winding-up claim and, while it might be unusual, it will be prepared to make an order if there are good grounds for doing so.

The cases before the Manx courts regarding disclosure in winding-up claims are Gittins and others v. Simpson and Secure Nominees Limited v. Origo Partners and others.

Both cases confirmed that although such an order in a winding-up proceeding is unusual and exceptional, the court has the discretion to order disclosure and the tests and rules in respect of orders for specific disclosure are the same as they would be in any other application. ‘There is no jurisdiction to make an order for specific discovery unless (1) there was sufficient evidence that documents exist which have not been disclosed; (2) the documents related to matters at issue in the proceedings; and (3) there was sufficient evidence that the documents were in “the possession, custody or power” of the other person.’

Even when those prerequisites for the jurisdiction exist, the court still has discretion as to whether to order discovery. Again, the ordinary rules regarding the making of an order for specific disclosure apply. Documents and classes of documents must be defined precisely; discovery must be necessary to dispose of the matter fairly; and necessity, fairness and proportionality must be considered. The court will also not countenance ‘fishing expeditions’.

In most winding-up claims, disclosure is likely to be unnecessary and will not be ordered on the grounds that it is not required to dispose of the matter fairly. Where winding up is sought on the grounds of inability to pay a debt, there will ordinarily be evidence of such insolvency or inability to pay the debt such that disclosure is not needed, or if there is a genuine dispute over the alleged debt then, in the ordinary course, the winding-up claim would be dismissed. When a court is being asked to wind up on the just and equitable ground then, again, in most cases the evidence will be clear on its face. If, for example, the claim is brought because of deadlock in the management of the company, that deadlock either does or does not exist, and disclosure would not be required. However, there may be circumstances outside the normal course in which disclosure is necessary.

In Secure Nominees Limited v. Origo Partners and others, Deemster Doyle did not find helpful arguments put forward that because disclosure in winding-up matters were rare and exceptional that an order should not be made. While the learned Deemster did not make an order for disclosure in that case, he made clear that the fact that such orders are rare and exceptional is simply a statement of fact and does not form part of the test for determining whether a disclosure order should be made. The dispute must always be whether there is jurisdiction to make an order and, if so, whether the court should exercise its discretion to make one. It follows that if there are good grounds and reasons for making a disclosure order in the specific circumstances of a winding-up claim, highly unusual though they might be, then a disclosure order should be made.

iii Isle of Man FSA and Gordon Wilson (provisional liquidator and deemed official receiver of The Eco Resources Fund PCC Plc) and others CHP 2017/28

This case provides useful guidance as to the factors the court will take into account when determining who should act as liquidator in a public interest winding up when there are competing proposals for liquidator.

The court had ordered that Eco Resources Fund PCC Plc (Eco) be wound up and that Gordon Wilson be appointed provisional liquidator and deemed official receiver. Prior to his appointment as provisional liquidator, Mr Wilson had been appointed by the FSA as adviser and controller to Eco. As adviser and controller, Mr Wilson had all the powers to advise or to operate, manage and administer the affairs of Eco. At the first meeting of the creditors and contributories, Mr Wilson (as provisional liquidator) sought resolutions for his appointment as liquidator with no committee of inspection. The creditors and contributories voted against the resolutions, and one creditor subsequently sought the appointment of Mr Simpson as liquidator. Both Mr Wilson and Mr Simpson are highly experienced and respected liquidators, and the question of who should be appointed liquidator of Eco was brought before the court for determination.

After considering the facts, which included Mr Wilson having been very active in his roles as adviser to and controller of Eco, the court decided that Mr Simpson should act as liquidator.

In considering whom to appoint as liquidator when there are competing nominations, the court advised that it should consider the context within which the competing proposals arise.

His Honour the Deemster Doyle advised that, when considering competing contenders for appointment as a liquidator in a public interest winding up, the court should consider all the circumstances of the case, including the views of the FSA and the views of contributories and creditors. In a public interest winding up, the court will, no doubt, place significant weight on the views of the FSA but those views are not determinative as to who should be appointed liquidator. The court should consider the interests of those who support and oppose the appointment of the specified individual as liquidator. The court should also consider what is in the best interests of the company and its investors and the reputation of the island.

The court must consider the independence and impartiality of the proposed candidate. A liquidator, as an officer of the court, should be independent and above suspicion. There must not be any bias, nor any appearance of bias. If there are circumstances that might predispose a person to favour particular interests, those circumstances must be taken into account and the possibility of unconscious partiality should not be overlooked. The proposed candidate must be independent of interested parties, including the FSA.

His Honour advised:

The court must carefully consider whether the proposed liquidator is independent and impartial and is untainted by any inappropriate ‘baggage’, for example previous dealings with the company or those connected with the company or the FSA in respect of the company which make it difficult for such individual to be appointed liquidator over and above a more appropriate candidate. I accept that on occasions an individual’s previous dealings with, or experience of, the company prior to it going into liquidation may be appropriate ‘baggage’ and may in some cases be regarded as a positive factor in favour of appointing that person as liquidator. In other cases such previous dealings and experience with the company and the FSA may be inappropriate ‘baggage’ and would be regarded as a negative factor militating against that person being appointed as liquidator, in particular where there is a more suitable candidate who does not have the disadvantage of such inappropriate ‘baggage’.

His Honour concluded his judgment with the following advice: ‘The conduct of a liquidation (even a liquidation in the public interest) is not a matter for the FSA, it is a matter for the liquidator. He who pays the piper does not call the tune in liquidations, including public interest liquidations. The one who foots the bill does not have control of the liquidation. The liquidator acts, and must be seen to act, independently of the Treasury, the FSA, the contributories, the creditors, the officers of the company and any other interested parties.’

iv Isle of Man FSA and Michael Simpson (liquidator) CHP 2009/37

The liquidator sought the assistance of the court as to whether the provisions of Section 248 of the Companies Act 1931 applied to the liquidation even after the creditors had been paid the whole of their proved debts for the period up to the commencement of the liquidation. The liquidator was unclear as to whether Section 248 continued to apply if the company was no longer ‘an insolvent company’.

Section 248 of the Companies Act 1931 provides that in the winding up of an insolvent company, the rules of bankruptcy are to be applied with regard to the rights of secured and unsecured creditors and debts provable. The rules of bankruptcy are contained in the Bankruptcy Code 1892 and provide that if ‘there is any surplus after payments of the debts it shall be applied in payment of interest from the date of the receiving order’. If Section 248 continued to apply then unsecured creditors would receive interest at 4 per cent per annum on the amount of their proved debts from the commencement of the liquidation.

A review of English case law indicated that the courts in England had interpreted Section 248 in a manner that resulted in the Section having no application once the liquidation threw up a surplus, even though the company may have been insolvent at the commencement of the winding up.

The court advised that although Section 248 of the Companies Act 1931 is in the same terms as the English Section 317 of the Companies Act 1948 of Parliament, as the 1931 Act was not consolidating legislation, the Section did not need to be interpreted in the same restrictive manner as adopted in England and Wales and could be given its natural meaning.

His Honour Deemster Corlett held that it was inappropriate to follow the English line of authority and that it would be ‘illogical and unfair for the Isle of Man to have an insolvency regime in which different provisions apply in relation to the payment of statutory interest as between a creditor in a bankruptcy and a creditor in a winding up, in cases where there is a surplus’.

His Honour advised that ‘the imposition of statutory interest is the fairest manner of adjusting the rights of creditors’.

v Banners Broker International Limited (In Liquidation) CHP/2014/24

This case concerned an application by the joint liquidators of Banners Broker International Limited (In Liquidation) (the Company) for the liquidation in the Isle of Man to be stayed until further order and the Isle of Man joint liquidators to be released, as the centre of main interest of the liquidation was more closely associated with Canada than the Isle of Man.

In addition, the joint liquidators sought the sanction of the court to enter into the transition service and assignment agreement (the Assignment Agreement) that assigns, transfers and conveys to a Canadian receiver, on an ‘as is where is’ basis of the joint liquidators’ rights, titles and interests in and to the company estate and that the joint liquidators should sign the Assignment Agreement forthwith.

The joint liquidators had been installed following the granting of a Manx court order in respect of an Isle of Man-based company.

As the matter unfolded, a receiver was appointed in Canada, who, in turn, discovered that the centre of main interest of the Company was in fact not the Isle of Man but Canada.

The Court in analysing its jurisdiction to grant the orders subject to the application made reference to Section 194(1) of the Companies Act 1931 and relevant authority, stating:

4. Under section 194(1) of the Companies Act 1931 this court has a wide power to make an order staying winding up proceedings: ‘. . . either altogether or for a limited time, on such terms and conditions as the court thinks fit’.

5. Deemster Kerruish in Navigator Gas Transport plc (judgment 4 July 2006) did not consider that the permanent stays sought by the Committee of Inspection in that case were detrimental to any creditor. The learned Deemster noted that the continuation of the liquidations would be against the wishes of the secured creditors. The learned Deemster saw no prejudice to anyone in granting permanent stays. The learned Deemster also considered the ‘commercial morality and the interests of the public at large’.

6. Derek French, in Applications to Wind Up Companies, second edition at page 369, states:

‘A stay may be ordered if it is more convenient to wind up the company in another jurisdiction. [Footnote 265: Re Oriental Bank Corporation (1884) 10 VLR (E) 154; Re Stewart and Matthews Ltd (1916) 26 Man R 277 – in both cases no creditor objected].’

7. At page 1071 of McPherson’s Law of Company Liquidation, third edition by Andrew R Keay, it is stated:

‘The effect of an order staying the winding up, if expressed in unlimited terms, is that the winding-up process comes to an end – the whole effect of the winding up ceases, and the company can thereupon resume the conduct of its business and affairs as if no winding up existed. The liquidator is entitled to a discharge.’

The court also noted that:

9. Under section 184(2)(h) of the Companies Act 1931, the liquidator in a winding up by the court shall have the power ‘to do all such other things as may be necessary for winding up the affairs of the company and distributing its assets’. The Joint Liquidators have power to enter into the Assignment Agreement. Moreover, under section 184(3) of the Companies Act 1931, the exercise by the Joint Liquidators of the powers conferred by section 184 is subject to the control of the court.

The court, having analysed its jurisdiction under the Companies Act 1931 and case law, and having taken consideration of the circumstances of the specific case, ordered that the liquidation of the Company in the Isle of Man be stayed in favour of the continuation of the receivership in Canada, that the joint liquidators be released, subject to compliance with the various other orders made by the court, sanctioned to entry into of the assignment agreement and required the joint liquidators to enter into the assignment agreement forthwith.

This was the first reported case in the Isle of Man of the transfer of the centre of main interest from the Isle of Man to another competent jurisdiction.

vi The Isle of Man FSA v. Louis & Ors (CHP 2016/73)

This case related to an application surrounding a legal argument focusing on whether an application by the FSA for disqualification orders against two parties under the Company Officers (Disqualification) Act 2009 (the 2009 Act) was within time and, if it was not, whether this court should grant leave for the application to proceed.

One point that fell to consideration by the court was in relation to the interpretation which should be given to the wording ‘wound up’ within Section 5(3) of the 2009 Act and hence the time period within which a claim should be brought under that Section.

Section 5(3) of the 2009 Act provides that an application under that Section ‘may only be made before the end of the period of 2 years beginning with the day on which the company is wound up or dissolved, unless the High Court grants leave for an application to be made later’.

The advocate for the seventh and eight defendant, relying on Section 169 of the Companies Act 1931, submitted that ‘for the purposes of section 5(3) “wound up” means the date of the presentation of the winding up claim and that the two-year time period in respect of companies subject to a winding up order would begin to run on that date’.

The advocate for the seventh and eight defendant further submitted that, ‘in respect of companies placed into creditors’ voluntary liquidation, the two-year time period would begin to run from the date of the resolution placing the companies into liquidation’.

In contrast, the advocate for the claimant submitted that ‘in respect of those companies subject to a winding-up order, the time would begin to run at the completion of the winding-up process and in respect of companies placed into creditors’ voluntary liquidation, the time would begin to run from the date of the completion of the liquidation’.

Drawing support from the Appeal Division’s helpful judgment in Taylor and another v. AG, the court considered that, in construing the words in Section 5(3) of 2009 Act, regard be had to the language of the Section, its purpose and its context.

The court considered that Section 5 of the 2009 Act has the dual purpose of the protection of the public from unfit officers of insolvent companies and the protection of defendant officers of insolvent companies from stale claims.

In considering the point, His Honour stated in his judgment:

The use of the words ‘wound up or dissolved’ has created a difficult case of statutory construction, but in my judgment the Manx two-year clock starts to tick under section 5(3) of the 2009 Act:

(1) in cases where a winding-up order is made, from the date when the company is completely wound up;

(2) in cases where the company is in creditors’ voluntary liquidation, from the date of the completion of the liquidation; and

(3) in respect of companies struck off the register without being wound up, from the date of dissolution.

vii Summoning liquidators for court examination

This case related to three applications by the liquidator seeking orders that the two other parties to the application, who are former directors of all three companies, be summoned to appear before the court to be examined on oath concerning the promotion, formation, trade, dealings and affairs of each company pursuant to Section 206 of the Companies Act 1931.

Section 206 of the Companies Act 1931 gives a court power to summon before it any officer of a company that is being wound up by the court, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs or property of the company. Such a person may be examined on oath ‘either by word of mouth or on written interrogatories’. The court may also require parties to produce any relevant books and papers.

The court noted that the wording of Section 236 of the Insolvency Act 1986 of Parliament is very similar to that of Section 206 of the Companies Act 1931 and considered it appropriate to follow the approach set out in the English authorities, there being no exceptional local conditions that should lead the court to a different approach in this case.

In considering the applications made by the liquidators, His Honour Deemster Corlett stated in his judgment that ‘Tynwald has vested in liquidators this “extraordinary” and “sui generis” power, and the court should not hesitate to use it in a proper case, it might be said especially in a case such as this where so many investors have lost so much money’.

His Honour Deemster Corlett further stated that, when considering Section 206 of the Companies Act 1931:

The liquidators have the burden of proof. They must satisfy me at this time that there exists a reasonable requirement for information which can be obtained by way of oral examination under section 206. I accept that the liquidators do not have to make out the requirement in detail, but the liquidators nonetheless must make out the requirement.

Until the court sees the areas of questioning, it is simply unable properly to evaluate whether the reasonable requirement test is met.

While I accept that the proposed form of order may be based on those set out in the schedule to the 1934 Winding-up Rules (it being noted that they refer to a public examination), I do not accept that such an order is nowadays a proper one to make. It fails in my judgment to take account of the body of case law to which both counsel have referred.

The court requires to be satisfied that the liquidators have a reasonable requirement for the information, that it is not already in their possession, that they have conducted a search and analysis of the documents already in their possession and that specific gaps require to be filled by way of an oral examination of Messrs Bourbon and Richardson.

Source: lexology.com

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