Blessing liquidators’ decisions: How does the Court decide?

The Royal Court of Guernsey has recently considered an application under the Companies (Guernsey) Law 2008 (the Law) for the Court to approve a contract for the sale of the assets of a Guernsey company in compulsory liquidation. The decision provides helpful guidance for liquidators and creditors as to the issues the Court will take into account in deciding whether to grant such approval.

Background

In the matter of CanArgo Limited (in liquidation), Lieutenant Bailiff Hazel Marshall QC considered an application made by the Joint Liquidators of CanArgo Limited (in liquidation) for the Court’s approval of a transaction they had entered into for the sale of some of its assets.

A major creditor raised a number of objections to the transaction which resulted in several adjournments and the application stretching over the course of 6 hearings.

Section 426 of the Law

Section 426 of the Law states:

“The liquidator of a company may seek the Court’s directions in relation to any matter arising in relation to the winding up of the company and upon such application to the Court may make such order as it thinks fit.”

Although the scope of that section is very wide, LB Marshall QC noted there were two established limitations:

1. Firstly, section 426 cannot be used by a liquidator to obtain an order that a liquidation has been completed, thereby discharging the liquidator from office and granting a release; and

2. Secondly, an application under s.426 must be for “directions” i.e. guidance from the Court to assist the liquidator. This will include guidance as to the liquidator’s intended course of action but would not cover retrospective unconditional approval of a transaction.

LB Marshall QC considered the latter element to be analogous to a “blessing” application in the context of trust administration, in which a trustee can approach the Court for a blessing of a momentous decision it seeks to make, such as a sale of a significant trust asset.  In the context of a liquidation, selling an asset is not in itself “momentous” but LB Marshall QC’s view was that a complex or contentious decision would fall within this definition.

Further, LB Marshall QC considered an application under s.426 to be akin to what is commonly referred to a Beddoe application in the context of proceedings concerning trusts.  A Beddoe order is sought by a trustee whereby the trustee asks for the Court to sanction a specific course of action and obtains protection in relation to the costs of any proceedings related to that action.

LB Marshall QC’s view was that, like a Beddoe application, an application under s.426 can be held in private.  However, the liquidator should convene relevant parties to the application if it requires them to be bound by the Court’s decision.

Seeking the Court’s directions

LB Marshall QC provided some salutary guidance for when such applications involves a commercial transaction:

1. The crucial point for the Court to consider is the nature of the liquidator’s decision making exercise, and evidence of this must be provided to the Court. The Court is not appraising the merits of the decision but whether the decision is that of a reasonable liquidator, taking into account all relevant facts and reaching a proper, logical and reasonable decision.

2. Importantly, s. 426 does not allow a liquidator to abdicate responsibility and surrender its discretion to the Court. The Court is willing to assist a liquidator with directions, but it is the function of the liquidator to make the decisions in their conduct of the liquidation.    Further, the liquidator can take the decision even without the Court’s blessing (but would have to defend that decision if challenged, without the benefit of the Court’s endorsement).

3. Liquidators should ensure that the terms of the contractual arrangement permit them to provide full disclosure to the Court.

4. Liquidators should heed caution to terms which may fetter their decision making and obligation to consider and act on all available information.

5. If a decision involves confidential information, the liquidator must disclose that fact to the Court. The Court can assist by conducting parts of the hearing in private or only between the relevant parties.

Essentially, in providing directions in response to an application under s. 426, the Court is seeking to assist the liquidators in performance of their duties as officers of the Court.  A liquidator can aid the Court in this process by providing evidence of the facts and matters relevant to the decision, how those have been considered, and the reasoning process taken.

Summary

This welcome decision will greatly assist liquidators when faced with a difficult or “momentous” decision and how they can utilise s. 426 to obtain the Court’s guidance and blessing of their course of action and decision making process.

Associate Alison Antill acted for the Third and Fourth Joined respondents in the application.