In October 2020, the Royal Court handed down helpful guidance on the principles applicable to directions applications made by Guernsey liquidators and other similar office-holders, particularly when such applications are made for the purposes of approving an office holder's intended course of action.
The guidance comes in the form of Lieutenant Bailiff Hazel Marshall QC's judgment in the matter of Canargo Limited - In Liquidation (GRC064), in which Appleby's Guernsey dispute resolution team represented two of five respondents (together Achernar), who constituted the vast majority of creditor claims against the Company.
By an application for directions pursuant to section 426 of the Companies (Guernsey) Law, 2008 (Companies Law), the joint liquidators (JLs) of Canargo Limited (Company) sought the Court's approval of a conditional asset purchase agreement (CAPA) executed in October 2019.
By the CAPA, the JLs purported to sell the Company's 50% shareholding in, and loan notes issued to it by, three subsidiary companies (Assets). The purchaser under the CAPA was the first respondent to the application (MND), and already held the other 50% shareholding in those subsidiaries. The CAPA was made conditional upon the JLs obtaining the Court's approval of their decision to enter into the CAPA and complete the transactions contemplated by it. The application was therefore made shortly after the execution of the CAPA.
Achernar had sight of the CAPA for the first time after being served with the application. After receiving the CAPA, Achernar expressed concerns that the sale of the Assets would prejudice the recovery of funds for the benefit of the liquidation estate from a valuable claim which the Company has against MND pursuant to various English law contractual documents (Funding Claim). MND generally disputed the substance of the Funding Claim.
At the invitation of the JLs, Achernar responded to the application and tendered written evidence together with legal submissions over the course of 6 days in Court, between 1 July 2020 and 16 September 2020.
Owing to the fact that MND was a respondent to the Application and a potential defendant to the Funding Claim, certain parts of the hearing took place in camera between the JLs and Achernar, to the exclusion of all other parties. As recorded in the judgment, certain in camera parts of the hearing included discussion of the potential impact of the CAPA on the Funding Claim, which falls to be determined under English law and in respect of which Achernar had funded the JLs obtaining legal advice from leading English counsel.
Following the parties' respective submissions to the Court, the CAPA was not approved in the form sought in the application. A modified version of the CAPA was eventually approved by the Court, removing certain shareholdings and loan notes from the Assets, to be retained by the JLs with the intention of minimising or removing any potential prejudice to the Funding Claim.
Helpfully, LB Marshall QC concluded her judgment by commenting on some general principles that arose during the case, which should assist practitioners faced with similar applications in future, subject always to the determination of such applications turning on their individual facts. It is worth reading LB Marshall's conclusions in full, though a brief summary is set out below for ease of reference:
- Whilst section 426 of the Companies Law refers to liquidators seeking directions, its scope is broad enough to encompass liquidators seeking the Court's approval of their intended course of action;
- Such an application will be considered on the same principles applicable to a request by a trustee for the Court's "blessing" of a momentous decision, albeit taking account of the different purposes of a trust and a liquidation;
- Such an application is analogous to a Beddoe application in trusts proceedings, and as such can be conducted in private between the applicant office holder and the Court. However, where the application seeks to bind any party to the result, then those parties will need to be convened so that they might be heard on the application;
- The Court is not engaged to rule on the merits of the decision arrived at by the office holder. Instead, the purpose of the application is to determine, on the evidence before the Court, that the decision has been taken in a proper way (or to seek directions as to how to take it properly), and within the general bounds of what could be a reasonable decision in the circumstances;
- Although a "proper" decision must mean a properly and fully informed decision, a failure to obtain potentially helpful professional advice during the decision-making process does not automatically mean that the Court will refuse to bless the decision. LB Marshall QC took the view that if the possibility of obtaining such advice had been genuinely investigated but proved impossible or impractical due to a lack of funding, the Court could still accept the decision as being the best that could be taken in the circumstances;
- Office holders are not precluded from proceeding with their intended course of action even if the Court declines to give its blessing on the application. The absence of the Court's blessing simply means that, if the decision later becomes subject to challenge, the office holders will not have the benefit of the Court's prior endorsement that their decision was arrived at properly. This does not however mean that any decision taken and implemented without the Court's blessing will be found to be wrong or improperly taken;
- The obtain the "insurance policy" of the Court's blessing, office holders must act in good faith by providing the Court with full evidence of their reasoning process for arriving at the decision, setting out the facts and matters considered, even if certain matters might be adverse to the officer holders' interests;
- Where the decision to be blessed relates to a commercial transaction, three particular points may need consideration in light of the above:
- Where office holders enter into a contractual obligation to obtain the Court's approval of the proposed transaction (as the JLs did with MND), office holders should be careful to ensure that the contractual provisions do not impede their ability to make full and frank disclosure to the Court;
- Office holders should also ensure that any contractual "exclusivity of dealing" provisions do not prevent them from being able to consider and place before the Court any further information or opportunities which might arise subsequent to those contractual arrangements; and
- If certain relevant material comes to office holders' knowledge on a confidential basis, officer holders must at least reveal this fact to the Court and explain whether or not this information has had any effect on their decision. The Court can then consider whether it can bless their decision without knowing the content of the confidential information or, if not, arrangements might be made by office holders to obtain the consent from the other party to that information for its disclosure to the Court, with any appropriate safeguards.
As a final summary, LB Marshall QC set out the following:
"In summary, the applicant liquidator (or other similar office-holder) needs to bear in mind, in preparing evidence for the court in such an application, that its objective is to take the court through the whole of the decision making process which he has himself taken, so as to satisfy the court that this has been careful, comprehensive and rational, according to the particular circumstances, and thus that the decision which he has made, but which remains his own decision, has been reasonably made."
The judgment will hopefully form a useful starting point for office holders and their advisors as to the approach to be taken by the Royal Court in directions applications made for the purpose of approving particular courses of action, particularly bearing in mind the broad scope of section 426 of the Companies Law.
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.