Re ICGI - the high bar for the appointment of provisional liquidators
In a recent decision of the Grand Court of the Cayman Islands (Re ICG I), Justice Doyle dismissed an application by a contributory for the appointment of joint provisional liquidators (JPLs) pursuant to section 104(2) of the Companies Act.
The judge held that the appointment of receivers over the company, on the same day as the application was heard, was a sufficient safeguard against any dissipation of assets or further mismanagement by the directors pending the determination of the winding-up petition. The judgment confirms that the appointment of JPLs is a “serious step” and applicants for such orders have to satisfy a “heavy and onerous burden”.
Justice Doyle summarised the four conditions which an applicant must meet to justify appointing JPLs:
- A winding-up petition has been presented but a winding-up order has not yet been made;
- The applicant has standing to make the application (ie a creditor, contributory or Authority);
- There is a prima facie case for making a winding-up order; and
- The appointment of the provisional liquidator is necessary to prevent the dissipation or misuse of the company’s assets and/or the oppression of minority shareholders and/or the mismanagement or misconduct on the part of the company’s directors (the necessity test).
The application turned on the applicant’s failure to overcome the necessity test. Notwithstanding that Justice Doyle found that the applicant demonstrated serious concerns over the activities of the director and the alleged shadow director of the company, Justice Doyle was persuaded that the appointment of Deloitte as receivers over the shares in the company and Deloitte’s appointment of an independent director, which replaced the board of directors, were sufficient to secure the company’s assets (being properties in Japan) from dissipation, future mismanagement or misconduct. Justice Doyle also considered that a Japanese seizure order over the properties in respect of unpaid taxes was another safeguard against the disposal of the assets. If necessary, the applicant could consider applying for an injunction in Japan to further safeguard the assets.
This judgment is a timely reminder that the appointment of JPLs is considered to be a draconian remedy which will not be granted lightly. Practitioners should first exhaust potential alternatives to safeguard a company’s assets from dissipation or management before seeking the appointment of JPLs. Evidence that alternative remedies to preserve assets from dissipation or misconduct by errant directors is necessary before applying for JPLs.