IOM Court cannot appoint provisional liquidators purely for rescue plan

No jurisdiction to appoint PL’s for substantive rescue plan purpose

In a significant insolvency decision, Acting Deemster Gough has ruled that the Isle of Man Court lacks jurisdiction to appoint a provisional liquidator (PL) under ss 177-178 Companies Act 1931 for the substantive purpose of effecting a rescue.

The Court held (at §§ 6, 66-67):

“6. The office of provisional liquidator exists as an incident of a pending winding-up proceeding and for purposes connected with that proceeding. It cannot be used to create a creditor-driven rescue or administration process which Tynwald has not enacted…

66. Sections 177 and 178, read together, permit appointment of a liquidator provisionally for the purpose of conducting the pending winding-up proceedings and performing duties in reference to them. They do not permit appointment for the substantive purpose of investigating, formulating and pursuing a rescue package while the winding up claim is suspended. The court may not use the existence of a genuine petition and conventional ancillary powers as a gateway to create a creditor-driven administration process.

67… The court has no jurisdiction under [ss] 177 and 178 of the Companies Act 1931 to appoint provisional liquidators for the substantive purpose of investigating, formulating or pursuing a rescue or reconstruction of the Company. A provisional liquidator validly appointed for purposes connected with conducting the winding-up proceedings may be given incidental powers relating to a compromise or restructuring, but rescue cannot itself be the statutory purpose of the appointment.”

Background

In HSBC Bank Middle East Ltd & others v Allana International Ltd (CHP 26/0057) (04.09.26), the Claimant banks, creditors of Allana International Ltd (Allana), presented a winding-up claim, on the basis that it was unable to pay its debts.

Allana is the Manx holding company at the head of a group said to employ 14,000 people in 22 jurisdictions.

Some $667 million was said to be owed to the Claimant banks; approximately $758 million to them and their affiliates; and approximately $1.686 billion to the wider body of creditors.

Pending determination of the winding-up claim, the banks sought to appoint four Joint PL’s: “to remove control from the present directors, stabilise the group, obtain information and investigate, formulate and, if possible, implement a restructuring or rescue. If no restructuring is possible, the Claimants say that they will seek a winding-up order” (§ 2).

The proposed JPL’s powers (§ 11) would include: “taking custody of records and assets, investigating affairs, carrying on business, selling assets, raising finance and granting security, lending to affiliates, exercising the Company’s shareholder powers over subsidiaries, changing subsidiary boards, commencing insolvency proceedings in other jurisdictions and implementing a corporate reorganisation”.

Allana, and two of its three equal shareholders, were opposed.

The Acting Deemster found the issue “difficult” (§ 5): “There are powerful pragmatic and commercial arguments in favour of the Claimants’ construction. A rescue may preserve a valuable international business, protect employment and produce a materially better return for creditors than an immediate liquidation. Courts in several common-law jurisdictions have used provisional liquidation flexibly to facilitate restructuring, and there are Manx instances in which provisional liquidation and a rescue process have operated together.”

Against this, as the opponents pointed out: “…the JPLs would be appointed not to advance a winding-up but to avoid one”.

Sections 177-178 of the Companies Act 1931

Section 177 of the Companies Act 1931 – now, of course, almost 100 years old – provides:

“For the purpose of conducting the proceedings in winding up a company and performing such duties in reference thereto as the court may impose, the court may appoint a liquidator or liquidators”.

Section 178 of the Companies Act 1931 provides:

“(1) Subject to the provisions of this section, the court may appoint a liquidator provisionally at any time after the presentation of the winding up petition.

(2) The appointment of a provisional liquidator may be made at any time before the making of a winding up order and either the official receiver or any other fit person may be appointed.

(3) Where a liquidator is provisionally appointed by the court, the court may limit and restrict his powers by the order appointing him”.

The Court’s analysis: “[J]urisdiction must precede discretion”

The Court’s starting-point (§ 29) was:

“29. … the language of the statute read as a whole and in its legislative context. A purposive approach does not entitle the court to select a desirable policy outcome and then enlarge the statutory words to achieve it. The statutory purpose must itself be derived from the enactment.

30. … insolvency legislation commonly gives the court a broad discretion and leaves the criteria for its exercise to judicial development. But a broad discretion is not the same as an unlimited jurisdiction. The court may develop principles governing when and how a statutory power is exercised; it may not alter the purpose for which Tynwald conferred the power.

31. … in Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36 … Lord Sumption emphasised that judicial development must remain consistent with local law and public policy and must not amount to judicial legislation. Singularis … does… require caution where the proposed construction would create the substance of a management-displacing rescue procedure, with a moratorium and extensive powers, which the legislature has not enacted. Tynwald will be aware that England and Wales and several offshore jurisdictions have adopted express rescue procedures. It has not enacted an equivalent general regime…

33… Subsection (3) permits the court to limit and restrict the officeholder’s powers. It does not itself confer an unrestricted power to add functions unconnected with liquidation…

34… Reading section 178 as unconstrained by section 177 would detach the provisional office from the statutory function which gives the liquidator his character…

35. … Section 178(3) enables tailoring within the statutory purpose. It does not permit the court to substitute another purpose. Rule 21 similarly regulates the application and the exercise of discretion…

38. … the present order is not sought principally to hold the ring pending the winding-up decision. The winding-up decision is to be postponed so that the JPLs may take control, investigate rescue possibilities and formulate and pursue a restructuring designed, not to complement, but to avoid a winding-up order. There is no primary winding-up purpose. The winding-up route is used by the Claimants as a platform for a rescue, not a winding-up…

60. … the existing 1931 Act does not confer the jurisdiction sought. The court cannot remedy the absence of a rescue regime by assigning to a [PL] a primary function which falls outside the statutory winding-up purpose. Whether the Island should have administration, examinership, restructuring officers or a modified form of provisional liquidation, and with what safeguards, is a matter for Tynwald.

61. The court’s conclusion does not inhibit the use of existing statutory tools. A final liquidator may exercise powers conferred by the 1931 Act, including seeking a section 152 scheme where its terms apply. A [PL] appointed for genuine preservation or investigation pending a winding-up decision may be given powers incidental to that valid appointment. Parties may pursue a consensual restructuring. What the court cannot do is constitute provisional liquidation as the rescue procedure itself…

65. … jurisdiction must precede discretion…”.

Note for practitioners: Reaching its decision, the Court in Allana International reviewed Manx, English, and other common law / offshore decisions. Manx decisions reviewed included: Unicorn Worldwide Holdings Ltd v P Court Ltd [2014] MLR 563; Louis Group (IOM) Ltd v LG Properties Alpinia Ltd [2017] MLR 346; Lehman Brothers Inc v Navigator Gas Management Ltd CPL 2004/9-14 (31.05.05); Re Kaupthing Singer & Friedlander (Isle of Man) Ltd CP 2008/94 (19.02.09); and Re 2E2 (IOM) Ltd (unrep.); and the Court relied on the Hong Kong decision in Re Legend International Resorts Ltd [2006] 2 HKLRD 192 (§§ 51-54). It will be interesting to see whether this important decision is challenged or now represents the settled position on the scope of the Court’s jurisdiction under ss 177-178 Companies Act 1931.

Disclaimer: professional advice should be sought before applying any information in a given case.

For advice on Isle of Man litigation relating to insolvency, contact Coren Law.

See also Coren Law’s Isle of Man civil procedure portal: Click On | Coren Law.

Photo credit: Dion