A vital component in the liquidation of a Cayman Islands company is the formation of a liquidation committee (Committee) which will assume a consultative role and act in an advisory capacity to the liquidator regarding strategy, decision-making and intentions.
In almost all compulsory liquidations, the liquidator is required to establish a Committee. The Committee of a company being wound up will be elected at the first meeting of the stakeholders in the liquidation.
As a generality, the liquidator will have preference for a balanced Committee which is reflective of the full range of the different classes of stakeholders which may exist. However, this is not always possible since stakeholders may vote for whichever nominee they choose. This can give rise to a Committee which is biased in favour of one creditor group, and in In Re Herald Fund SPC (In Official Liquidation), the Grand Court confirmed that it no longer has an inherent jurisdiction to rule on the composition of a Committee. Therefore, absent evidence of gross misconduct, fraud or inappropriate behaviour, the Court cannot dismiss or reconstitute a Committee.
Express rights and duties of Committee members
The Committee acts as a confidential sounding board for the liquidator. The liquidator will often discuss issues like the wider restructuring of the company in question or any other rescue alternatives that may be available. In the event that the Committee is called upon to consider matters of a legal nature, the Committee may resolve to appoint a lawyer to give advice to the Committee, either generally or in respect of any specific matter arising in connection with the liquidation.
Membership of the Committee provides a member with extensive access to information not ordinarily shared with non-members relating to the liquidation. Members are also able to request particular reports from the liquidator. The liquidator is obliged to furnish the members with records of his accounts when required. As a result, prospective members will be asked to sign a confidentiality undertaking as a condition to taking a seat on the Committee, given that much of the information provided to them will be commercially sensitive and, in many cases, legally privileged.
Becoming a member of a Committee creates a fiduciary relationship with other creditors and contributories. Committee members must act honestly and in good faith. Specifically, members should know that they will be prevented from deriving a profit from their office on the Committee. Furthermore, a member is strictly prohibited from allowing his private interests to conflict with his duty as a Committee member.
From a practical perspective, a prospective Committee member should provide the liquidator with a proxy form detailing which of its employees are authorised to act on its behalf at official meetings. Members can (and frequently do) appoint their own lawyers as their representative.