Cayman Islands insolvency practitioners received some welcome guidance and clarification recently regarding the Grand Court’s power to make directions relating to the formation and composition of liquidation committees following last year’s amendments to the Companies Winding Up Rules 2008.
This timely development (which also covered the underlying methodology to be adopted when determining a company’s solvency for the purpose of establishing a liquidation committee) was the result of a recent ruling (In Re Herald Fund SPC [In Official Liquidation] – FSD 27/13, Grand Court [unreported], Jones J, 28 January 2014) in which Walkers acted for the joint official liquidators.
Formation of a liquidation committee
The Companies Winding Up Rules (as amended) express a clear preference that a liquidation committee be established for every company being wound up by the court. The financial status of the liquidation ultimately determines the composition of any liquidation committee. The official liquidator is required to determine whether a company should be treated as solvent, insolvent or of doubtful solvency for the limited purpose of determining (i) the composition of the meeting(s) by which the committee is elected and (ii) the composition of the liquidation committee itself.
No jurisdiction to dispense with composition requirements
The basic premise of the Rules in relation to the composition of a liquidation committee is to ensure that stakeholders with no practical interest in the liquidation are excluded from influencing the conduct of the company’s affairs. Previously, the court had broad powers to make directions not only in relation to the composition of a liquidation committee, but also with respect to the powers that would be available to a committee in the liquidation (see Re Saad Investment and Finance Company Limited #5  (2) CILR 63).
In light of last year’s amendments to the Companies Winding Up Rules, the court has made it clear that it no longer has any ability (by way of its inherent jurisdiction or otherwise) to make directions with respect to the composition of a liquidation committee (other than dispensing with a committee altogether in the appropriate circumstances). However, it remains unclear whether the court would consider that it retains the power to expressly define the powers of a committee under its general mandate of supervision of all official liquidations.
Dispensing with the requirement to establish a liquidation committee
Where an application has been made to dispense with the requirement to establish a liquidation committee, the court will examine why a liquidation committee cannot be formed in compliance with the Companies Winding Up Rules (as amended). Importantly, if the liquidator’s determination with respect to the solvency of a company is the sole reason why a liquidation committee cannot be formed in compliance with the Rules, the court may examine the methodology used by the official liquidator to determine the solvency (or otherwise) of the company.
If the court is not satisfied that the methodology was appropriate in all of the circumstances, it is unlikely to dispense with the requirement to form a liquidation committee, and may also direct the official liquidator to reconsider his determination as to the solvency (or otherwise) of the company so that a compliant liquidation committee may be formed. Of course, regardless of the financial position of the relevant company, there will always be cases where it is simply not possible to form a compliant committee. In those circumstances, it appears that the court would have no alternative but to direct that there be no formal liquidation committee.
How should a liquidator determine solvency?
This recent ruling has provided some additional clarity to liquidators, with the court expressly endorsing a balance sheet test as the applicable test for determining the solvency of a company. Essentially, this test requires official liquidators to make reasonable assumptions about assets and liabilities which are contingent or contingent in amount in determining whether a company is, or is likely to become, solvent or insolvent.
The court has made it clear that liquidators are expected to undertake this exercise in a thorough and rigorous manner. While inherent difficulties clearly exist in properly estimating the value of highly contingent assets and liabilities, a company should only be determined to be of “doubtful solvency” where “if, at any given time, its official liquidator is of the opinion that the final outcome is no more or less likely to be solvent or insolvent, having regard to the likely resolution of some particular contingency or the likely outcome of a combination of different unrelated contingencies.”
While it is clear that the court no longer has jurisdiction to sanction a liquidation committee which does not comply with the composition requirements set out in the Companies Winding Up Rules (as amended), insolvency practitioners need to be aware that the court may look behind an official liquidator’s determination as to solvency, particularly where an official liquidator seeks to dispense with the requirement to form a liquidation committee. The court has strongly indicated that it will not dispense with this requirement unless it is satisfied that the official liquidator has undertaken an appropriate “balance sheet” analysis of the financial position of the company. Importantly, it appears that doubtful solvency will now apply only in quite limited circumstances.