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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

Lordships’ Board.

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

company.

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.

 

  1.         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

 

  1.             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.

DELOITTE AND TOUCHE A.G. v. JOHNSON and DINAN (change liquidators)

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