Isle of Man: Insolvency Update: Challenging A Liquidator's Decisions By Judicial Review

Last Updated: 16 February 2016
Article by Adam Killip

His Honour Deemster Doyle (the Isle of Man's Chief Justice) recently handed down judgment in a case which considered the legal principles applicable when a party seeks to challenge decisions made by a court-appointed liquidator during the liquidation of a company.

This decision was the first of its kind on the Isle of Man and represents the latest in a long line of judgments relating to The Spirit of Montpelier Limited (the "Company"), an Isle of Man company which was placed into liquidation in May 2014. DQ's Stephen Dougherty and Adam Killip acted for the liquidator.

Background to the claim

The Company had only ever had one asset, which was a yacht named The Spirit of Montpelier. In order to purchase the yacht, the Company had borrowed funds on a secured basis from an asset finance company called Lombard Manx Limited ("Lombard"). There was one contributory (member) of the company, Montpelier Holdings LLC, and Lombard was the only secured creditor. A number of other parties claimed to be unsecured creditors of the Company, although at the time of the hearing before His Honour Deemster Doyle, the liquidator had neither accepted nor rejected their proofs of debt. The Company's total indebtedness to its creditors (including the alleged unsecured creditors) was in excess of £2 million.

In July 2015 (just over a year after the Isle of Man High Court had placed the Company into liquidation), the liquidator sold the yacht to a third party. Montpelier Holdings LLC and the alleged unsecured creditors of the Company (together the "Claimants") were aggrieved at the liquidator's decision to sell the yacht and brought a doleance claim in the Isle of Man High Court. A doleance claim is similar to a claim for judicial review in English law. The Claimants sought an order quashing the liquidator's decision to sell the yacht, together with an award of damages.

The Claimants' case

It was common ground between the Claimants and the liquidator that, pursuant to sections 184 and 185 of the Companies Act 1931,  the Court had the power to review the liquidator's decisions and that the Court could interfere with such decisions if satisfied that at least one of the grounds for a successful doleance claim were met. Such grounds are that the liquidator acted illegally, irrationally or unreasonably (in the sense that no reasonable liquidator would have taken the action which the liquidator took).

The Claimants' principal arguments were that:

  • prior to the sale of the yacht, the liquidator had failed to sufficiently consider an offer made by one of the Claimants, Mr Gittins, to have the yacht surveyed and for it to be refurbished to bring it up to "A1 condition";
  • despite having been requested to do so, the liquidator had failed to call meetings of the contributory and creditors to ascertain their wishes regarding the survey and refurbishment; and
  • the liquidator had been wrong in deciding to sell the yacht because he had not taken the Claimants' views into account and had given undue weight to the views expressed by Lombard.

The legal principles

The Claimants and the liquidator agreed that the relevant test for challenging the liquidator's decisions pursuant to the Companies Act 1931 was to ask whether the liquidator did something so utterly unreasonable and absurd that no reasonable person would have done it. This is clearly a high test, and is derived from an English case called Re Edennote Limited [1996] 2 BCLC 389. His Honour Deemster Doyle noted that this test is similar to the test in Isle of Man law in respect of doleance claims.

The Court's decision

The Court dismissed each of the complaints made by the Claimants and held that the liquidator's decisions were not "so utterly unreasonable and absurd that no reasonable person would have [made them]" (to paraphrase the test from Re Edennote Limited).

The Court held that the liquidator was not liable for the failure to call the meetings requested by the contributory and alleged unsecured creditors of the Company, that the liquidator had taken proper advice in respect of the sale of the yacht and that he had not failed to take the Claimants' wishes into account.

It is clear from this judgment that the Court will be slow to interfere with commercial decisions made by professional liquidators unless it can be shown that such decisions meet the high test set out in Re Edennote Limited or meet the grounds for a successful doleance claim, i.e. that the decisions were illegal, irrational or unreasonable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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