Challenging a Liquidator's Actions, Decisions or Omissions under BVI law
By Julie Engwirda
Posted: 3rd March 2015 08:43For many members or creditors who apply for the appointment of a liquidator, there is a feeling that the real battle is won once the liquidator has been appointed. However, what happens when the liquidation is not conducted in a way that falls within the expectations of the members or creditors of the company. More importantly, to what extent can the members or creditors challenge the decision, actions or inactions of the liquidator. BVI law provides several avenues for a member or creditor to actively participate in the liquidation process. This article examines the Court's ability to review and if thought fit, exert control over a liquidator through the provisions of section 273 of the Insolvency Act, 2003(1), which provides as follows:
"A person aggrieved by an act, omission or decision of an office holder may apply to the Court and the Court may confirm, reverse or modify the act, omission or decision of the office holder."
Who can apply?
The provision is drafted in very broad terms and on first reading would appear to allow any person, irrespective of their standing in respect of the insolvent company, who felt aggrieved to make an application to the Court. However, the Courts(2) have held that relief is not available to any "outsider" who may feel dissatisfied with the acts or decisions of the office holder, but is limited to only those persons who are directly affected by a power specifically extended to a liquidator(3).
A person aggrieved "must be a man who has suffered a legal grievance, a man against whom a decision has been pronounced which has wrongfully deprived him of something, or wrongfully refused him something or wrongfully affected his title to something': Re Sidebotham, ex p Sidebotham (1880) 14 ChD 458 at 465 per James LJ. This is not to be regarded as an exhaustive definition; Lord Denning held that the words 'person aggrieved' are "of wide import and should not be subjected to a restrictive interpretation. They do not include, of course, a mere busybody who is interfering in things which do not concern him; but they do include a person who has a genuine grievance because an order has been made which prejudicially affects his interests': A-G of Gambia v N'Jie  2 All ER 504 at 511(4).
What acts, omission or decision are open to challenge?
What sort of acts, omissions or decisions are subject to attack? A liquidator is conferred with broad powers under Schedule 2 of the Insolvency Act, 2003. The powers and functions of a liquidator would be severely eroded if the Court were willing to intervene in the liquidation, or entertain challenges of a liquidator's performance, every time a creditor or member felt any degree of dissatisfaction with how the liquidation was proceeding. Such an approach could easily lead to the liquidation being stalled and be open to abuse. For this reason, the Court has held that it will not normally interfere in the liquidator's exercise of his power and discretion as to the management and realisation of assets of the insolvent company(5).
The court will be loath to interfere with a liquidator's exercise of discretion when carrying out his statutory powers. The commercial decisions of a liquidator are afforded great weight, with the Courts recognising that a liquidator has both appropriate qualifications and access to information to enable him to make such decisions(6). As such, the court has shown a willingness to interfere only where it can be established that the decision or act in question was taken in bad faith or if it was so perverse as to demonstrate that no person properly advised could have taken it. The test was laid out in a decision of the English Court of Appeal in Re Edennote Ltd  2 BCLC 389
"… the test (in the absence of fraud) is that the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it. .... The reasonable man would, in circumstances reasonably calling for it, take legal advice. So one is to assume that the liquidator has been properly advised. One asks whether what he did was perverse on the assumption that he has taken proper legal advice."
The threshold is high and not easily overcome. In the Eddennote case the Court was willing to intervene as it determined that, although the liquidator acted in good faith, the liquidator had taken into consideration matters which he ought not to have taken into account and had failed to take into consideration some matters which ought to have been taken into account. Some other examples of when the court has been willing to intervene are:
- A landlord who claims to be aggrieved by a liquidator's election to disclaim a lease on behalf of the insolvent company tenant.
- A creditor who complains that an asset was, or is proposed to be disposed of at an undervalue;
- A creditor, who is also a director of the insolvent company, who was excluded from a creditors meeting.
- A refusal by the liquidator to assign a speculative claim to a former controller of the insolvent company, where the only offer received for the claim came from the former controller and the liquidator did not intend to pursue the claim himself.
The Act provides that the Court "may confirm, reverse or modify the act, omission or decision of the office holder." This gives the Court a very broad discretion as to what steps it may take. In the case of Re Edennote Limited the Court went so far as to set aside the complained of transaction, but refused to remove the liquidator.
Some points to take away. In the BVI, the current practice of the Court(7) when appointing a liquidator is to impose a requirement that certain powers of the liquidator may only be exercised with sanction of the court (such as the power to pay any class of creditors in full or the power to compromise a debt). This is not the case in the UK where a liquidator's powers are not fettered to the same degree. Accordingly, the question must arise whether the requirement to obtain sanction would have a bearing on the Court's consideration of a s.273 application in circumstances where the liquidator has acted without the Court's sanction or, having sought sanction and failed to obtain it, the liquidator nonetheless proceeds and acts contrary to directions given by the Court.
The position of a voluntary liquidator appointed out of court throws up additional challenges, as the sanction requirements imposed upon a court appointed liquidator do not apply. What steps should a voluntary liquidator take when, for example, assigning a cause of action that is thought to have little prospect of success and which the liquidator does not intend to pursue? Many insolvency practitioners in the BVI adopt a cautious approach and seek approval from members/creditors and the sanction of the court in such circumstances. It is not suggested that the failure to seek sanction would of itself properly open up to challenge such actions of a voluntary liquidator, but it may increase the likelihood of a challenge arising.
Partner Julie Engwirda specialises in insolvency and corporate recovery (both contentious and non-contentious). Julie is a key member of the firm's distressed funds practice and has a wide range of experience in respect of complex commercial litigation matters, including matters involving shareholder disputes, fraud and trust disputes. She is a member of the American Bankruptcy Institute, INSOL, a director of the Recovery & Insolvency Specialists Association (BVI) Limited ("RISA") and a founding director of the Women's Offshore Network (BVI).
Walkers has an extensive global footprint and receives regular instructions from a wide range of clients on significant litigation and restructuring cases. The firm has in-depth experience in handling corporate and banking disputes, enforcement proceedings and asset-tracing work. The team advises clients both on-shore and offshore on all aspects of commercial litigation with particular emphasis on corporate disputes, professional negligence (involving office holders, directors, auditors, etc), contentious banking and financial issues, asset tracing, enforcement proceedings, fraudulent actions, trust disputes, and conflict of laws. The BVI office is a full service law office providing advice on all aspects of BVI law: in addition to litigation and insolvency, it provides advice on corporate and international finance law, investment funds, regulatory issues and trusts. Having opened in 2002, the BVI office benefits from the network of the firm's offices in the Cayman Islands, Dubai, Ireland, Jersey, London, Hong Kong and Singapore.
(1) A similar power is found in s.168(5) of the UK Insolvency Act, 1986, except the UK section does not expressly extend to "omissions" and is limited to the "liquidator". BVI law extends the provision to "office holders" which is defined to include provisional liquidators, liquidators and administrative receivers.
(2) There are no reported BVI cases on the application of s.273 of the Insolvency Act, 2003. There are presently 2 cases pending before the BVI court where relief has been sought under this provision but as yet no final judgments have been given in either case.
(3) A secured creditor would ordinarily have no standing to make an application under s.273 of the Insolvency Act, as the Act expressly reserves to a secured creditor the power to enforce its security after the liquidation has commenced.
(4) This decision arose out of professional negligence proceedings against a barrister.
(5) Re ACLI Metals (London) Ltd (AML Holdings Inc v Auger) (1989) 5 BCC 749
(6) Mineral Securities Australia Ltd (in liq)  NSWLR 207and Keay,AR, McPhersons's Law of Company Liquidation at 9.060
(7) This practice developed under the tenure of Justice Bannister QC, who is due to retire from the BVI Commercial Court in March 2015. That is not to suggest that Justice Leon, the incoming Judge of the Commercial Court, will take any different approach.