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Mistakes Were Made… What Is A Liquidator To Do? – Corporate and Company Law


A fundamental principle of insolvency law in the Cayman
Islands is that upon the commencement of a liquidation of a
company, a line is drawn in the sand and the assets of an insolvent
company should be distributed on a pari passu basis (e.g.
each unsecured creditor should share equally in the available
assets of the company). While subject to some exceptions (like any
good fundamental principle of law), the concept that all unsecured
creditors should be on “equal footing” is the basis for a
wide array of insolvency legislation and case law. From voidable
preference legislation to laws permitting the avoidance of
undervalue dispositions, from the extensive investigative powers
bestowed upon Court-appointed liquidators to the particularised
proof of debt process, great care has been taken to ensure that the
pari passu principle is respected to the extent
possible.

Section 110(1) of the Cayman Islands Companies Act
(“Act”) confirms that it is the function of an official
liquidator “to collect, realise and distribute the assets
of the company to its creditors…
“.

Given the importance of the pari passu principle, it is
always worth noting when a liquidator, with the Court’s
approval, departs from this norm.

Chief Justice Smellie’s recent Ruling in In the matter
of Premier Assurance Group SPC Ltd. (In Official Liquidation)

(unreported, 7 April 2022) is one such departure, in an interesting
case involving the receipt of mistaken payments after the
commencement of a winding up.

Mistakes were made

The joint official liquidators of Premier Assurance Group SPC
Ltd (the “Company”) found themselves in a slightly odd
situation, where it appeared that a large volume of payments had
been paid to one of the Company’s segregated portfolios (the
“SP”) after the commencement of the liquidation of the
Company (in this case, the commencement of the liquidation being
the date the winding up petition was presented).

The Company was registered as an exempted segregated portfolio
company in the Cayman Islands and was previously issued with an
unrestricted Class ‘B’ License. The SP had offered
unit-linked life insurance products globally (with the exception of
the United States and Cayman Islands). Since the commencement of
the liquidation of the Company, the SP had received around 6,000
premium payments which totalled in the region of US$5 million (the
“Mistaken Payments”).

The Court found that the Mistaken Payments were paid following
the presentation of the winding up petition in respect of the
Company and after the Company’s operations had effectively been
suspended given that no benefits were being paid to the
participants who held policies with the Company referable to the
SP. In the circumstances, no benefit would have accrued to a payer
in respect of a Mistaken Payment and the Company would have been
fixed with this knowledge at the time of receipt.

What is a liquidator to do?

As above, the general position is that any asset of an insolvent
company should be distributed by an official liquidator on a
pari passu basis. In this case, application of that
principle might have led to the result that the individuals who had
mistakenly paid funds might only receive a fraction of their funds
back, while other creditors (who had not made such payments) might
benefit from the payers’ mistake.

The JOLs considered that this would be an unjust result and
applied to Court for sanction under section 110(2) of the Companies
Act to return the Mistaken Payments to the payers as monies held on
trust. The JOLs’ application was not opposed (and it did not,
therefore, receive the benefit of full adversarial argument), but
the Chief Justice agreed that it was self-evident that the decision
of the JOLs to return the Mistaken Payments to the payers was
entirely proper and one which should receive the approval of the
Court.

The Court found that a constructive trust had been imposed in
respect of the premium payments received by the Company after the
presentation of the winding up petition in favour of each of the
respective payers. Applying the decision of In the matter of
Caledonian Bank Limited (in Official Liquidation)
[2015 (2)
CILR 8] (which involved mistaken payments by depositors to an
insolvent bank), the Chief Justice found that it was or must have
been obvious to the Company that premium payments made after the
presentation of the winding up petition were by fundamental
mistake, in that it is inconceivable that a participant would have
made it, if he or she had been aware that a winding up petition had
been presented against the company. In those circumstances it would
be unconscionable for the Company to retain the monies as assets of
its own, against the claims of the payers.

Although not cited in the Chief Justice’s judgment, the
decision is consistent with English case law regarding the special
status of Court-appointed liquidators. A joint official liquidator
is an officer of the court by virtue of his or her appointment and
is subject to a special duty to deal fairly, and in an exemplary
manner, in all respects of the performance of his or her
functions.

Conclusion

Once upon a time, there may have been more opportunity to catch
a mistaken payment before it was made to a company against whom a
winding up petition was pending.

As reliance on internet banking increases, with large sums being
transferred at the click of a button (and with many payments being
made automatically without any click of a button), it would seem
that the number of mistaken payments is destined to increase.

The judgment provides helpful guidance in relation to mistaken
payments generally, and in relation to the powers and duties of
official liquidators when payments are made, or received, by
mistake, after the commencement of a Company’s liquidation.

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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