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Removal Of Liquidator
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DELOITTE AND TOUCHE A.G. v. JOHNSON and DINAN (change liquidators)
This case is all about the question of change liquidators:
1 LORD MILLETT, delivering the judgment of the Board: The
question for decision in this appeal is whether a debtor or alleged debtor
of a company in liquidation can apply for the removal of a liquidator, in
whom the creditors and contributories of the company appear to have
5 confidence, on the ground that he is subject to a conflict of interest. There
is also a related question on which the appellant petitions for special leave
to appeal. This is whether the defendant to an action brought by a
company in liquidation can ask the court to restrain the liquidator from
prosecuting the action on the same ground.
10 The proceedings arise out of the liquidation of Omni Securities Ltd.
(“the company”), a company incorporated in the Cayman Islands and a
member of the Omni Group of companies. The company was placed in
voluntary liquidation in November 1991. By an order of the Grand Court
of the Cayman Islands in March 1992, the liquidation was ordered to
15 continue subject to the supervision of the court. A liquidation committee
was formed in May 1996. The respondents to the present appeal are the
joint liquidators of the company. They are partners of the Cayman
practice of Coopers & Lybrand. An associated practice, Coopers &
Lybrand (Switzerland), is one of the liquidators of the company’s ultimate
20 holding company.
In March 1995 the respondents caused the company to bring
proceedings in the Grand Court (Cause No. 104 of 1995) against a
number of defendants, alleging negligence in the audit of the company’s
financial statements for the years 1988 and 1989. The Cayman practice of
25 Deloitte Haskins & Sells (now Deloitte & Touche) were the company’s
auditors. The field-work relating to the audit of the company’s 1988 and
1989 financial statements was carried out in Switzerland on their behalf
by the appellant, an associated firm carrying on business in Switzerland
and then known as Deloitte Haskins & Sells A.G. (now Deloitte &
30 Touche A.G.). The appellant also signed off the audit report for the
company’s financial statements for 1990. It is the eighth defendant in
Cause No. 104. The other defendants are all parties connected with the
Cayman practice. The audits of most of the other companies in the Omni
Group were carried out by the associated UK practice (“DH&S (U.K.)”).
35 The appellants allege, and for the purposes of the present appeal the
respondents accept, that if there was negligence in the audit of the
company’s financial statements as alleged, DH&S (U.K.) were at fault in
failing to provide the appellant with material information.
The writ in Cause No. 104 was served on the appellant in March 1996.
40 It promptly applied by originating summons for an order removing the
respondents as liquidators of the company or, alternatively, restraining
them from continuing the conduct of the proceedings against it by reason
of their conflict of interest. No less promptly the respondents issued a
summons to strike out the originating summons on the grounds that the
45 appellant had no locus standi or real interest in applying for the relief
1999 CILR 301
sought. Smellie, J. (as he then was) dismissed the respondents’ summons,
but the Court of Appeal allowed the respondents’ appeal and struck out
the appellant’s originating summons. The appellant now appeals to their
5 The appellant alleges that the respondents are subject to a conflict of
interest which arises in this way: In 1990 most of the international
practices of Deloitte Haskins & Sells merged with those of Touche Ross
to form the international organization now known as Deloitte & Touche.
DH&S (U.K.), however, did not join the new group, but merged instead
10 with the UK practice of Coopers & Lybrand, and now forms part of the
international organization of Coopers & Lybrand. The appellant contends
that the fact that the respondents are partners in a firm which is a member
of the same international organization as DH&S (U.K.) (now Coopers &
Lybrand (U.K.)) gives rise to a serious conflict of interest. The appellant
15 complains that the respondents cannot carry out their functions as
liquidators of the company properly and impartially when the actions
they take could have a significant bearing on the potential liability of their
associates at Coopers & Lybrand. In particular, they cannot be perceived
to have given proper consideration to the question of whether the
20 company should make a claim against Coopers & Lybrand (U.K.) or join
it as a defendant to Cause No. 104.
The appellant draws particular attention to the history of the
proceedings in Cause No. 104 so far. The writ alleges that the defendants
were guilty of negligence in relation to both the 1988 and 1989 audits.
25 This would expose Coopers & Lybrand (U.K.) to the risk that the
appellant would bring it into the action as a third party, particularly, it
seems, in relation to the 1988 audit. The statement of claim, however,
makes no allegations in relation to the 1988 audit. The appellant alleges
that this indicates a tailoring of the case by the respondents in the interest
30 of their associated firm rather than in the interests of creditors of the
The respondents deny that there is any conflict of interest, but they
accept that, this being an application to strike out the proceedings, the
court must proceed on the footing that the appellant’s allegations are true.
35 The question on the appeal, therefore, is whether the appellant, which is
neither a creditor nor a contributory, has any locus standi to invoke the
statutory jurisdiction of the court to remove the respondents as liquidators
of the company. The question on the petition for special leave to appeal is
whether, as a defendant to existing proceedings, the appellant can invoke
40 the inherent and supervisory jurisdiction of the court over its own officers
to restrain the respondents from proceeding further with Cause No. 104.
Their Lordships will consider these questions separately.
- The statutory jurisdiction to remove a liquidator
45 The companies legislation which was under consideration by the Court
1999 CILR 302
of Appeal was the Companies Law (1995 Revision). The legislation has
since been consolidated and revised as the Companies Law (1998
Revision). The parties are agreed that there are no material differences
between the two, although the section numbers have been altered as a
5 result of the addition of a new s.4 in the 1998 Revision. Their Lordships
will refer to the provisions of the 1995 Revision. The legislation is based
upon the English Companies Act 1862.
Section 106(1) provides:
“Any official liquidator may resign or be removed by the Court
10 on due cause shown; and any vacancy in the office of an official
liquidator appointed by the Court shall be filled by the Court.”
It is common ground that this section applies not only to a compulsory
liquidation but also (by virtue of s.153) to a liquidation which is
continuing subject to the supervision of the court. The corresponding
15 section which applies to a voluntary winding up is s.143. This provides:
“If, from any cause whatever, there is no liquidator acting in the
case of a voluntary winding up, the Court may, on the application of
a contributory appoint a liquidator or liquidators; and the Court may,
on due cause shown, remove any liquidator and appoint another
20 liquidator to act in the matter of a voluntary winding up.”
Their Lordships make two observations on these sections. In the first
place, each of the sections has two limbs, one enabling the court to
appoint a liquidator to fill a vacancy, and the other enabling it to remove a
liquidator for cause. In the second place, save in the case of the
25 appointment of a liquidator in a voluntary winding up where the
application must be made by a contributory, there is no express restriction
on the category of person who may make the application. Where an
insolvent company is being voluntarily wound up, it appears that a
creditor who wishes to apply for the appointment of a liquidator must
30 either petition for a compulsory winding up or apply for the liquidation to
continue under the supervision of the court.
In the course of argument, reference was made to the cases on the
corresponding statutory provisions in England. For convenience,
therefore, their Lordships set out the terms of the relevant English section
35 which corresponds to s.106 of the Companies Law (1995 Revision). This
is s.108 of the Insolvency Act 1986, which provides:
“(1) If from any cause whatever there is no liquidator acting, the
court may appoint a liquidator.
(2) The court may, on cause shown, remove a liquidator and
40 appoint another.”
It will be seen that the two sections are in largely similar terms. Each
contains the same two limbs; neither prescribes the person or persons
who may make the application.
The appellant submits that as a matter of ordinary construction, s.106
45 confers on the court a power to remove a liquidator for cause without any
1999 CILR 303
limitation on the category of person who may make the application. It
draws a contrast with other sections of the Companies Law which do
contain such a limitation. Section 95, for example, restricts the right to
apply to the court for the winding up of a company to creditors and
5 contributories. Sections 102 (application for a stay of proceedings), 140
(determination of questions in a winding up) and 143 (set out above) all
contain express restrictions on the person or persons who may make the
application. By contrast, s.106 contains no requirement that the applicant
should be a creditor or contributory, or that he should have a direct
10 financial interest in the conduct of the liquidation. There is certainly no
express requirement and, it is said, none should be implied, since it is
impossible to foresee all the circumstances which may justify the removal
of a liquidator.
The appellant concedes that not everyone is a proper person to make
15 the application. It submits that any person who has an interest in making
the application or who may be affected by its outcome is a proper person
to make it. It says that it is such a person since it is critically affected by
decisions which the liquidators will make in the conduct of the
proceedings which the company has brought against it. The real question
20 is whether it can establish due cause for the removal of the respondents as
liquidators. This, it is submitted, is a separate question which can only be
determined after a full investigation of the grounds upon which the
removal of the liquidator is sought. Unless obviously ill-founded, it
submits, an allegation of impropriety could not be summarily dismissed
25 without investigation, and the same applies to an alleged conflict of
interest. It is not to be supposed that the court would lightly permit its
own officers to place themselves in a position where their interest
conflicts with their duty.
The appellant has cited numerous authorities on the circumstances in
30 which an English court will exercise its power to remove a liquidator for
cause. Their Lordships do not find them helpful to the appellant. They
show that impropriety is not necessary; that it is sufficient to satisfy the
court that the removal of the liquidator will be for the general advantage
of the persons interested in the liquidation; that in the absence of
35 impropriety, the court will have regard to the wishes of the majority of
those interested; but that where impropriety is shown the court may
override their wishes. The cases do, however, show that the courts have
consistently regarded the creditors (in the case of an insolvent
liquidation) and the contributories (in the case of a solvent liquidation) as
40 the proper persons to make the application, being the only persons
interested in the liquidation. Their Lordships have not been shown any
cases in which the court has removed a liquidator who is able and willing
to act, on the application of anyone who is not a creditor or contributory,
as the case may be.
45 The appellant places much reliance on recent cases in England under
1999 CILR 304
s.108(1) of the Insolvency Act 1986. They have been concerned with the
situation which arises when an office-holder with numerous appointments
is incapable of continuing in office. Where he has automatically vacated
office on having his authorization withdrawn, the courts have appointed
5 another office-holder in his place on the application of the former office-
holder himself, his former partners, the Secretary of State, and the
Insolvency Practitioners Association. The court has also acceded to an
unopposed application by the former partners of an office-holder who has
resigned from his firm and is unable to continue in consequence, to
10 remove him and appoint another partner in his place.
In all these cases the applicant has had a professional or official
responsibility to bring to the attention of the court the existence of a large
number of vacancies which needed to be filled. The only question of
substance was whether it was necessary to incur the expense and delay of
15 calling meetings of the creditors in every case in order to fill them. The
court was prepared to remove the office-holder and thus create the
vacancies it was asked to fill only where the office-holder accepted that
he was incapable of acting. In such a case it recognized the reality of the
situation, which was that the office was, to all intents and purposes,
20 already vacant. But it refused the application and left the decision to the
creditors where the office-holder, though unwilling to continue in office,
was capable of doing so: see Re Sankey Furniture Ltd. (3) and Re A. & C.
Supplies Ltd. (1).
In their Lordships’ opinion, two different kinds of case must be distin
25 guished when considering the question of a party’s standing to make an
application to the court. The first occurs when the court is asked to
exercise a power conferred on it by statute. In such a case the court must
examine the statute to see whether it identifies the category of person who
may make the application. This goes to the jurisdiction of the court, for
30 the court has no jurisdiction to exercise a statutory power except on the
application of a person qualified by statute to make it. The second is more
general. Where the court is asked to exercise a statutory power or its
inherent jurisdiction, it will act only on the application of a party with a
sufficient interest to make it. This is not a matter of jurisdiction; it is a
35 matter of judicial restraint. Orders made by the court are coercive. Every
order of the court affects the freedom of action of the party against whom
it is made and sometimes (as in the present case) of other parties as well.
It is therefore incumbent on the court to consider not only whether it has
jurisdiction to make the order but whether the applicant is a proper person
40 to invoke the jurisdiction.
Where the court is asked to exercise a statutory power, therefore, the
applicant must show that he is a person qualified to make the application.
But this does not conclude the question. He must also show that he is a
proper person to make the application. This does not mean, as the
45 appellant submits, that he “has an interest in making the application or
1999 CILR 305
may be affected by its outcome.” It means that he has a legitimate interest
in the relief sought. Thus, even though the statute does not limit the
category of person who may make the application, the court will not
remove a liquidator of an insolvent company on the application of a
5 contributory who is not also a creditor: see Re Corbenstoke Ltd. (No. 2)
(2). This case was criticized by the appellant. Their Lordships consider
that it was correctly decided.
The standing of an applicant cannot therefore be considered separately
and without regard to the nature of the relief for which the application is
10 made. Section 106(1) does not limit the category of persons who may
make the application. The appellant, therefore, does not lack a statutory
qualification to invoke the section, but the question remains whether it
has a legitimate interest in the relief which it seeks. It is not asking the
court to appoint a liquidator to fill a vacancy. It is asking the court to
15 remove incumbent liquidators for cause. The English cases relied upon by
the appellant show that an interest which is sufficient to support an
application of the former kind may not be sufficient to support an
application of the latter kind.
The company is insolvent. The liquidation is continuing under the
20 supervision of the court. The only persons who could have any
legitimate interest of their own in having the respondents removed from
office as liquidators are the persons entitled to participate in the ultimate
distribution of the company’s assets, that is to say the creditors. The
respondents are willing and able to continue to act, and the creditors
25 have taken no step to remove them. The appellant is not merely a
stranger to the liquidation; its interests are adverse to the liquidation and
the interests of the creditors. In their Lordships’ opinion, it has no
legitimate interest in the identity of the liquidators, and is not a proper
person to invoke the statutory jurisdiction of the court to remove the
30 incumbent office-holders.
The appellant’s case is not advanced by alleging that the respondents
have a conflict of interest. This is not the same as impropriety or want of
probity. Their Lordships observe that the expression “conflict of interest”
is an abbreviation for “conflict of interest and duty.” The rule is that a
35 fiduciary may not, without the informed consent of his principal, place
himself in a position where his interest may conflict with his duty to his
principal. The danger is that his interest may affect him in the discharge
of his duty to the prejudice of his principal. The only persons with a
legitimate interest in complaining of a breach of the rule are the persons
40 to whom the duty is owed, and they may waive the breach. The appellant
does not allege that the respondents have an interest which conflicts with
any duty owed to it. It does not plead any such duty. It alleges that the
respondents have an interest which conflicts with their duty to the
company and its creditors. If such a conflict exists, it is for the creditors
45 alone to decide what, if anything, to do about it.
1999 CILR 306
- The inherent jurisdiction of the court over its own officers
As liquidators of the company, the respondents are officers of the court.
The court’s inherent jurisdiction to control the conduct of its own officers
is beyond dispute. But it does not follow that the appellant is a proper
5 person to invoke that jurisdiction. It says that the respondents are
behaving unconscionably by reason of their conflict of interest. But it
cannot say that the respondents are acting unconscionably towards it.
The appellant complains of the manner in which the respondents have
conducted the proceedings against it in Cause No. 104 of 1995. Thus it
10 makes the application as a defendant to existing proceedings. It does not
allege that those proceedings disclose no cause of action or are an abuse
of the process of the court. If such were the case, the appellant would
have an obvious remedy. It complains that the respondents have not made
Coopers & Lybrand (U.K.) a defendant to Cause No. 104. But the
15 appellant has the remedy in its own hands. If it wants to make Coopers &
Lybrand (U.K.) a party to the action, it can bring them in itself as a third
party. It complains that the respondents, being the persons in control of
the proceedings on behalf of the company, have interests which conflict
with those of the company and may accordingly not properly discharge
20 their duties to the company.
It is strange to hear a defendant complain that the proceedings against
it may not be pursued with sufficient vigour. If the company were not in
liquidation, the appellant could not be heard to complain of such conduct
on the part of its directors. It would be a matter within the exclusive
25 competence of the shareholders. Their Lordships do not accept the
fact that the company is in insolvent liquidation and that the liquidators’
duties are owed to the creditors rather than the shareholders gives the
appellant a standing to complain which it would not otherwise have had.
Their Lordships consider that the answer they have returned to the first
30 question effectively disposes of this question also. They will humbly
advise Her Majesty that the appeal and the petition for special leave
should both be dismissed. The appellant must pay the respondents’ costs
of both the appeal and the petition before their Lordships’ Board.
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