Knowledge

Both the remuneration and the expenses (i.e. service provider's costs, often primarily lawyers' fees) of a liquidator (or liquidators) appointed to liquidate a company in the Cayman Islands ("Cayman") can be significant and are payable out of the company’s assets in priority to some of the other liabilities, such as unsecured creditors and contributories claims. In particularly complex liquidations and those where the liquidator is conducting significant commercial litigation on behalf of the company, the company's contributories (i.e. shareholders) and/or creditors (together the "Stakeholders") may question whether the liquidator's remuneration claimed was properly and reasonably incurred and challenge the liquidator's decision-making or the resources deployed. Recent cases from the Cayman Grand Court (the "Court") in the context of contested remuneration applications suggest that Stakeholders' objections must be carefully considered and supported by appropriate evidence to avoid wasted time and costs and that liquidators can protect themselves from successful challenges by adhering to the Court's expectations of time recording and record keeping.

This briefing does not deal with the scrutiny and challenge of liquidators' expenses.

Statutory framework

As a preliminary point, a liquidation committee (the "LC") must be established in respect of every company in liquidation as long as the minimum number of three members are willing to serve. A key and express statutory role of the LC is deliberating on and approving (or not) the liquidator's remuneration.

The Cayman Companies Act states that "there shall be paid to … the official liquidator, such remuneration, by way of percentage or otherwise, that the Court may direct acting in accordance with rules made under section 155", i.e. the Insolvency Practitioner Regulations (the "Regulations").

The Regulations state, for example, that:

• a liquidator is not entitled to receive any remuneration out of the assets of a company in liquidation without the prior approval of the Court;
• however, a liquidator may receive payment on account from the assets of the company up to 80% of their claimed remuneration;
• before seeking the Court's approval for their remuneration, a liquidator must first seek the LC's approval of the basis of their remuneration ("Remuneration Agreement") and the amount of remuneration sought or, if there is no LC, convene a meeting of Stakeholders and propose a resolution by them approving the remuneration;
• a liquidator must prepare and provide to the LC, or if there is no LC to the Stakeholders, reports and accounts with sufficient information to enable them to make an informed decision about the reasonableness of the Remuneration Agreement and the amount of remuneration for which the liquidator intends to seek the Court's approval;
• if the liquidator seeks to be remunerated on a time spent basis, the liquidator's report and accounts shall provide full particulars of the work done, the staff engaged and the hourly rates applicable to each grade of staff; and
• the liquidator must serve their application for approval of their remuneration on the LC (and in the absence of an LC the liquidator may make the application without notice to Stakeholders).

As a result, regardless of whether the LC/Stakeholders approve of, or object to, the liquidator's remuneration, the liquidator needs to make an application to the Court (a "Remuneration Application"). The LC's/Stakeholders' position as to the liquidator's remuneration will, however, influence how the Court will approach and determine the Remuneration Application.

Takeaways from recent cases

The liquidator bears the burden of establishing that the amount and/or basis of their remuneration is fair, reasonable and commensurate with the nature and extent of the work properly undertaken and that the work for which they have charged has resulted in significant and proportionate benefits to the estate.

If the LC/Stakeholders approve the remuneration, the Court will place considerable reliance on their commercial judgment and perform only a summary assessment of the Remuneration Application based on affidavit evidence. On the other hand, if the LC's/Stakeholders' approval is not forthcoming, then the Court will scrutinise the application far more closely.

The Court is mindful, however, to ensure that Remuneration Applications do not become an onerous and expensive task by requiring a disproportionately detailed scrutiny of each application.

Objections to remuneration have been described by the Court as generally falling into two categories:

• an objection to the liquidator's commercial judgment and decision-making (e.g. it was unreasonable to pursue a particular workstream such that it should not have been pursued at all so that all or most of the costs claimed should be disallowed) (a "Core Challenge"); and
• an objection to the resources deployed and time spent by the liquidator and his or her staff in pursuing a specific workstream (e.g. a disproportionate or unnecessary amount of time was spent pursuing the workstream or the work should have been done by more junior staff) (a "Resources Challenge").

Core Challenges

If the LC/Stakeholders seek to challenge a commercial or business decision of the liquidator going to strategy, the manner in which the liquidation generally is to be conducted or key operational issues (i.e. by arguing that work should not have been done at all because the workstream was not justified), the Court will apply what is called a Wednesbury unreasonableness standard. This is a high threshold.

The Court will not interfere with the liquidator's decision to pursue a certain course of action unless the decision is such that no reasonable liquidator could, properly instructed and advised, in the circumstances, arrive at. In other words, was the liquidator's decision to pursue a certain course of action or workstream irrational such that it was clearly not reasonable in the circumstances, not necessary or achieved no useful result?

It is worth noting that the Court has observed that a Remuneration Application is not the proper forum for impugning a liquidator's commercial judgment or strategic decision-making. Rather, in circumstances where the liquidator has proceeded with a course of action under the exercise of a power requiring sanction (i.e. the Court's approval), the LC/Stakeholders should object to the Court sanctioning the liquidator’s exercise of that power (if approval is sought) or otherwise make their own sanction application in respect of the proposed exercise of the power. If the liquidator has proceeded with a course of action under the exercise of a power not requiring sanction, it is still appropriate that Stakeholders make a sanction application if they consider the liquidator should not be taking that action, rather than object to the costs involved after the event.

Resources Challenges

If the LC/Stakeholders seek instead to challenge the manner in which resources have been deployed by the liquidator, the Court’s focus will be on:

• whether the resources used and the resulting costs are proportionate to what is needed, having regard to the complexity of the tasks required and to the benefits that have resulted (or will result from) the work; and
• the fair value of the liquidator's work in the circumstances.

This has been expressed as requiring an analysis of whether a prudent man or woman faced with similar circumstances would lay out or hazard his or her money in the way that the liquidator has done.

Liquidators have been cautioned by the Court that it is not enough to say that what they have done is within the scope of their duties. Rather, they are expected to deploy commercial judgment, not to act regardless of expense. However, the Court has emphasised that the LC/Stakeholders must identify with specificity why the impugned costs are disproportionate to the benefits (if any) achieved or why they cannot be said to represent the fair value of the liquidator's work.

In practice, this type of challenge will be difficult to make out in the absence of plainly unreasonable costs, duplication or evidence from an independent expert (such as a fees assessor).

Supporting remuneration claims

The burden lies with the liquidator to place sufficient evidence before the Court to justify their remuneration claim and answer any challenge brought. The Court has stated that it will treat the UK Practice Statement: The Fixing and Approval of the Remuneration of Appointees ([2004] BCC 912) ("UKPS") as providing helpful guidance even though the statutory framework in England and Wales is different to that of the Cayman Islands. A liquidator can look to the UKPS for the sort of information that will need to be provided to support a Remuneration Application, including:

• a narrative description and explanation of:

  1. "the background to, the relevant circumstances of and the reasons for the appointment;

  2. the work undertaken or to be undertaken in respect of the appointment and in respect of which work the remuneration of the appointee is sought to be fixed and approved, which description should be divided, insofar as possible, into individual tasks or categories of task…

  3. the reasons why it is or was considered reasonable and/or necessary and/or beneficial for such work to be conducted…

  4. the amount of time to be spent or that has been spent in respect of work to be completed or that has been completed…

  5. what is likely to be and has been achieved, the benefits that are likely to and have accrued as a consequence of the work that is to be or has been completed, the manner in which the work required in respect of the appointment is progressing and what, in the opinion of the appointee, remains to be achieved."

• "a statement of the total number of hours of work undertaken or to be undertaken in respect of which the fixing and approval of remuneration is sought, together with a breakdown of such hours by individual member of staff and individual tasks or categories of tasks to be performed or that have been performed";

• "details of each individual to be engaged or who has been engaged in work in respect of the appointment and in respect of which the fixing and approval of remuneration is sought, including details of their relevant experience, training, qualifications and the level of their seniority"; and

• "details of the individual rates charged by the appointee and members of his staff in respect of the work to be completed or that has been completed and in respect of which the remuneration is sought to be fixed and approved."

Concluding remarks

Recent decisions of the Court have made it clear that, while Stakeholders of companies in official liquidation may challenge liquidators' fees, their objections must be carefully considered with detailed reference to the liquidator's supporting records and their own evidence, including, in appropriate circumstances, expert evidence. It is important for Stakeholders to note that contested Remuneration Applications can be costly and even if fees are reduced, unless the liquidator has acted wholly unreasonably, failed to present proper supporting records or misled the Court, the liquidator's costs of defending the Remuneration Application will be payable out of the assets of the company.

Bedell Cristin has advised Stakeholders and liquidators alike in this context. The best way to ensure good value from the liquidator's actions, and appreciation by Stakeholders of that value, is to ensure there is a clear Remuneration Agreement and that there is good communication between the liquidator and the Stakeholders. Liquidators should also ensure that all requisite evidence (noting the UKPS) is filed in advance of the hearing.

For more information, including on how to best set the liquidation up to avoid time-consuming and costly remuneration arguments, please reach out to your usual contact at Bedell Cristin or one of the contacts listed for assistance.