Before : |
Sir Timothy Le Cocq, Bailiff, and Jurats Austin-Vautier and Cornish |
IN THE MATTER OF THE REPRESENTATION OF STUART ARTHUR GARDNER, GAVIN DAVID YUILL AND KRISTOPHER STEWART ASPIN
AS JOINT LIQUIDATORS OF PETROLEUM PIPE GROUP LIMITED (IN LIQUIDATION)
PIPELINE SUPPLIES BAHRAIN WLL LIMITED (IN LIQUIDATION)
PETROSTEM GROUP LIMITED (IN LIQUIDATION)
PETROSTEM INTERNATIONAL LIMITED (IN LIQUIDATION)
AND PETROSTEM RENTALS LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF ARTICLES 155 AND 186A OF THE COMPANIES (JERSEY) LAW 1991, AS AMENDED
Advocate M. L. A. Pallot for the Representors.
judgment
the BAILIFF:
1. Stuart Arthur Gardner, Gavin David Yuill and Kristopher Stewart Aspin (-the Representors- or -Liquidators-) are the joint liquidators of Petroleum Pipe Group Limited (-PPG-), Pipeline Supplies Bahrain Wll Limited (-PSB-), Petrostem Group Limited (-PGL-), Petrostem International Limited (-PIL-) and Petrostem Rentals Limited (-PRL-), all in liquidation (-the Jersey Companies-), having been appointed by Act of Court of 28 August 2018, together with the Act of Court of 9 June 2023.
2. The Representors apply to this Court to sanction their decision to distribute the recovered assets of the Jersey Companies to the unsecured creditors, applying the method set out in a proposed model (-the Proposed Model-) to which we will make reference hereunder.
3. The application gives rise to a number of legal issues. The Court is conscious that it has not had the benefit of contrary legal argument but feels able to proceed to give consideration to this matter and to form a cautious view on the issues raised before us. In doing so, we are grateful to counsel for the thorough written submissions which we have to a large extent felt able to adopt.
4. The Representors are partners and directors of Ernst & Young LLP, a member firm of Ernst & Young (-EY-). Their appointment arose in the context of the just and equitable winding up, pursuant to Article 155 of the Companies (Jersey) Law 1991 (-Companies Law-), of the Jersey Companies.
5. The Jersey Companies form part of the PPG and PGL groups. At or around the time the Jersey Companies began insolvency proceedings in Jersey, insolvencies, in relation to other PPG and PGL group companies, were started in England and Wales, and in the Cayman Islands. Consequently, Mr Yuill and Mr Dempster (the latter replaced in these proceedings by Mr Aspin) were also appointed as:
(i) joint official liquidators to PPC Limited (In Official Liquidation) (-PPC Cayman-) alongside Mr Hutchison, who was an EY partner based in the Cayman Islands. Mr Dempster was replaced by Mr Aspin, following Mr Dempster's retirement. Mr Hutchison was replaced by Eleanor Fisher, also an EY partner in the Cayman Islands; and
(ii) joint administrators to Petroleum Pipe Co Limited (In Administration) (-PPC UK-). Mr Dempster was replaced by Mr Aspin, following Mr Dempster's retirement. Mr Yuill and Mr Dempster were also formerly joint administrators to Petrostem (UK) Limited, which was subsequently dissolved, its administration having been completed in 2022 (-PUK-).
6. All of these companies, the Jersey Companies, PPC Cayman, PPC UK and PUK are referred to jointly as the -Companies-, each being a -Company-. The Companies, prior to insolvency, were involved with the provision of various oil-related services principally in the Middle East and Asia Pacific regions.
7. The liquidation has been complicated in part by a claim for breach of directors' duties which was settled in mid-2023 on terms which are confidential as between the parties, save to say that this resulted in US$ 13 million being recovered by the Liquidators for the benefit of the creditors of the Companies. The recovery of this settlement enabled the secured creditor of the Companies to be paid in full. Priority preferential creditors have also been paid in full. Accordingly, as stated above, these proceedings concern the distribution of the surplus to unsecured creditors.
8. The Companies' sole secured creditor was Lloyds Banking Group (-LBG-). By this term we include reference to the Bank of Scotland which LBG acquired in 2000.
9. LBG had the benefit of several security arrangements and corporate guarantees. The key agreements for our purposes are:
(i) the corporate guarantee dated 11 March 2002 (the -First Corporate Guarantee-); and
(ii) the corporate guarantee dated 14 December 2006, read with the accession agreements dated 15 September 2008, 26 August 2009, 3 November 2011 and 25 June 2015 (together, the -Second Corporate Guarantee-);
(together, the -Corporate Guarantees-).
10. The principal effect of the Corporate Guarantees was to make each of the Companies jointly and severally liable for one another's obligations to LBG. The Corporate Guarantees contained various bank protections, including the ability to apply one Company's assets towards the discharge of another Company's obligations to LBG. In settling the debt due by the Companies to LBG, LBG took this action. It is not suggested that they were not entitled to do so.
11. Netting and set-off actions by LBG created a series of subrogated claims as between the Companies. Where assets of one Company were applied to discharge the debt of another Company owed to LBG, this created a subrogated claim by the discharging Company against the discharged Company.
12. The Representors argue that recognising LBG's actions under the Corporate Guarantees means in effect characterising the impacts of those actions as a series of subrogated claims as between the Companies. They submit that the Representors are required to apply the law of subrogation to determine how much cash should be allocated to each Company before distributing to the unsecured creditors of each Company. It is this exercise and its methodology in respect of which the Representors seek the sanction of the Court.
13. The Proposed Model sets out this methodology. It is designed to ensure a fair dividend is received by the unsecured creditors of each of the Companies. The Proposed Model sets out the steps taken by LBG under its various security arrangements, quantifies the subrogated claims that arise in consequence of each of those steps, and takes account of the impact of each so as to put into each Company the right amount of cash before making distributions.
14. Given what we are advised is the absence of direct Jersey-specific judicial guidance as regards subrogation, the Representors seek Court sanction. They seek to invoke the Court's jurisdiction under Article 186A of the Companies (Jersey) Law 1991 (-the Companies Law-) and Act of Court dated 28 August 2018, paragraph 3(j) which permits the Liquidators to make application -for sanctioning or ratification of any of their acts or omissions-.
(i) give effect to LBG's actions under the Corporate Guarantees - pursuant to the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005 (-the Netting Law-); and
(ii) apply the principles of subrogation to resolve intercompany claims arising from LBG's actions so far.
16. It is submitted that this Court has jurisdiction to grant this relief under Article 186A of the Companies Law which provides as follows:
-(1) The following persons, namely -
(a) the company, in a summary winding up;
(b) the liquidator or a contributory or creditor of the company, in a creditors' winding up,
may apply to the court for the determination of a question arising in the winding up, or for the court to exercise any of its powers in relation to the winding up.
(2) The court, if satisfied that it will be just and beneficial to do so, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or make such other order on the application as it thinks just.
(3) The court may exercise all or any of the powers that would have been exercisable by it or by the Viscount if a declaration had been made in relation to the company under the Désastre Law and may make an order terminating the winding up.-
17. It is also argued that jurisdiction exists under the Act of Court dated 28 August 2018, paragraph 3(j) which permits the Liquidators to apply to the Court -for sanctioning or ratification of any of their acts or omissions-.
18. The Representors rightly submit that Article 186A(1)(b) of the Companies Law envisages an application by -the liquidator or a contributory or creditor of the company, in a creditors' winding up-. The Representors were appointed in the context of a just and equitable winding up, not a creditors' winding up as we have stated above.
19. However, the Representors submit that paragraph 5 of the Act of Court dated 28 August 2018, extends the application of Article 186A to the Liquidators:
-Article 186A of the 1991 Law conferring a power for the Joint Liquidators, contributories and/or creditors to apply to the Court shall apply to the winding up of the Jersey Companies-
20. In any event, it would appear that Article 186A relief has been granted in the circumstances of a just and equitable winding up, eg in AAA Holdings Limited [2009] JRC 110. The judgment in AAA Holdings Limited does not say as much, in terms. However, the substance of the relief granted (sanction of a compromise) would appear to be in the nature of Article 186A relief. Equally, the Court's heading is suggestive of that -...AND IN THE MATTER OF ARTICLES 155(4) AND 186A OF THE COMPANIES (JERSEY) LAW 1991, AS AMENDED-.
21. We agree that we have jurisdiction. In our view, given its adoption into the Act of Court of 28 August 2018 the Court can apply its processes to these circumstances -mutatis mutandis- as well as under paragraph 3(j) of the Act of Court. In the future it may be better if the term -mutatis mutandis- is expressly adopted into an Act of Court to make clear that Article 186A applies to situations such as this.
23. We note that there are a number of instances in which the Royal Court has exercised a jurisdiction to sanction a decision by liquidators to pool the assets of insolvent companies and treat them as a single company for the purposes of distributions (see Rep of Roberts and Pirouet [2011] JRC 166 (a creditors' winding up) and Re Royco Investment Company Limited [1994] JLR 236 (a désastre)). In these cases, a factor in favour of pooling was that it would have been disproportionate to work out the exact amounts owed to creditors from each company.
24. The Representors submit, however, that pooling would not be appropriate. It is, so it is submitted, a different situation to Rep of Roberts and Pirouet and Re Royco Investment Company Limited. The Liquidators here have a substantial sum available for distribution (USD 9.8 million) and it would be inappropriate for the Liquidators to take the view that it is disproportionate to ascertain which Companies are properly entitled to what specific proportions of this sum.
25. This is the purpose of the Proposed Model.
26. We agree that we have the power to approve the Representors' Proposed Model if it is rational, made in good faith and is in the best interests of the creditors.
27. We observe that the Representors have obtained Opinions which confirm that no issues arise in England and Wales, nor in the Cayman Islands as far as the Proposed Model is concerned.
28. The Netting Law provides at Article 2(1) that:
-(1) Despite any enactment or rule of law to the contrary -
(a) a close-out netting provision of an agreement;
(b) a set-off provision of an agreement; or
(c) a contractual subordination provision of an agreement,
is enforceable in accordance with its terms-.
29. The definition of -set-off provision- in the Netting Law is:
-in respect of an agreement, means so much of the agreement, other than a close-out netting provision in the agreement, as relates to the netting of amounts due from one party to the agreement to any other party to it-.
30. The Representors submit that the provision must be read with the definition of -netting- in the Netting Law being:
-in respect of an agreement, means the conversion, into one net claim or one net obligation, of all claims and obligations arising under the agreement to the effect that only that net claim can be demanded or that net obligation is owed-.
31. The Netting Law defines the term -agreement- such that it:
-includes -
(a) an agreement between more than 2 parties;
(b) a series of inter-related agreements between the same parties (whether pursuant to a master netting agreement or otherwise); and
(c) an agreement made between parties whether or not acting through multiple branches and whether operated through a clearing house system or otherwise-.
32. The Representors argue the effect of the above provisions is to define which agreements are subject to the Netting Law. That is, an -agreement- is in scope if, among other things, it contains a -set-off provision- which relates to -netting-.
33. Article 2(2) of the Netting Law sets out the consequences of an -agreement- falling within scope of the Netting Law. Such an -agreement-:
-remains enforceable despite -
(a) the bankruptcy of a party to the agreement or of any other person; and
(b) the lack of any mutuality of obligation between a party to the agreement and any other person-.
34. It is also submitted that Article 2(3) of the Netting Law is -instructive- to liquidators (or other functionaries dealing in a similar capacity), insofar as it provides that:
-... any person dealing with the affairs of the bankrupt party or person shall, when dealing with the property of that party or person, give effect to any relevant provision of the type mentioned in paragraph (1).- [emphasis added]
35. The use of -shall- in the above provision means, in our view, that a liquidator (or other functionary dealing in a similar capacity) does not have a discretion as to whether to give effect to an -agreement- which falls within scope of the Netting Law. Accordingly, where a liquidator identifies an -agreement- which is in scope of the Netting Law, the liquidator must give effect to that -agreement-.
36. The Corporate Guarantees are governed by the law of England and Wales. However, it is submitted, that this does not affect the analysis of those Corporate Guarantees for purposes of the Netting Law. No restriction to Jersey contracts is contained in the Netting Law and the Netting Law extends to bodies corporate established outside of Jersey (see Article 6). It appears, prima facie, that the Netting Law was intended to deal with cross-border insolvency situations, and contracts made under different laws.
37. It appears to us, as submitted by the Representors, that the Corporate Guarantees fall within scope of the Netting Law because:
(i) the Corporate Guarantees are an -agreement- as defined in the Netting Law, given that they are -a series of inter-related agreements between the same parties-;
(ii) the First Corporate Guarantee contains clauses 1.3 and 4.1.1 which are in the following terms:
-1.3 The Guarantor acknowledges and agrees that this Guarantee and the rights of set off contained in it shall be a continuing security and shall extend to cover the ultimate balance due at any time to BoS from the Principal.
[...]
4. BoS' right of Set-off and Application of Funds and Currency
4.1 BoS may at any time, without prior notice to the Guarantor before or after any demand has been made under this Guarantee:-
4.1.1 exercise a right of set-off or retention in respect of all money at any time standing to the credit of the Guarantor's account(s) (or whatever nature and/or currency) against payment of all money at any time owing from the Guarantor to BoS on any account(s) and funds held following the exercise of this right of set-off may be held as security for the Secured Liabilities [...]-;
(iii) the Second Corporate Guarantee contains clauses 1.4 and 4.1, in the following terms:
-1.4 Each Guarantor acknowledges and agrees that its obligations under this Guarantee shall be continuing obligations and shall extend to cover the ultimate balance due at any time to BoS from each Principal and that the identity of the Principals and of the Guarantors may change from time to time in accordance with the terms of this Guarantee
[...]
4. Set-off
4.1 Each Guarantor agrees that any money from time to time standing to its credit on any account of a Guarantor (whether current, deposit, loan or of any other nature whatsoever) with BoS may be retained as cover for and/or applied by BoS at any time and without notice to any Guarantor (whether on or before or after the expiry of any fixed or minimum period for which such money may have been deposited) in or towards payment or discharge of any money or liabilities due, owing or incurred by such Guarantor to BoS in any manner, whether present or future, actual or contingent, joint or several, whether incurred as principal or surety (or guarantor or cautioner) or in any other way whatsoever)-;
(iv) the effect of clauses 1.3 and 4.1 of the First Corporate Guarantee and clauses 1.4 and 4.1 of the Second Corporate Guarantee constitute a -set-off provision- as defined in the Netting Law, in that these clauses constitute -so much of the agreement- as relates to -netting- which is defined in the Netting Law to mean
-the conversion, into one net claim or one net obligation, of all claims and obligations arising under the agreement...- [emphasis added], and
(v) the -one net claim or one net obligation-, in favour of LBG, can be seen in the final row of step 3 of the Proposed Model. This reflects a net claim which has been consolidated into PPG in the amount of $11,394,000.00.
(i) the doctrine of subrogation forms part of the customary law of Jersey; and
(ii) there is sufficient similarity between the English law doctrine of subrogation and Jersey law subrogation that where customary law authors are silent, we can look at English law.
41. Those submissions are, it is argued, supported by the following:
(i) whilst there are no judgments which expressly confirm that the doctrine of subrogation forms part of Jersey law, the Representors submit that implied acceptance of the doctrine can be seen from Guidon Investments Ltd v Malet de Carteret 1980 J.J. 109. In that case, the Royal Court accepted that a guarantor might place himself in the shoes of a satisfied creditor;
(ii) Dessain and Wilkins Insolvency and Asset Tracking 5ed at 5.9 refer to the Viscount's practice of accepting subrogated claims in limited instances;
(iii) subrogation is known in the context of dégrèvement, insofar as an otherwise uninterested party can stand in the shoes of the creditor of record (by separate private agreement with that creditor) and take property;
(iv) Le Gros, in his Traité du Droit Coutumier de L'Isle de Jersey at page 220, provides that:
"Lorsqu'elle paie le créancier, elle est subrogée à tous les droits et actions qu'il était en mesure d'exercer contre le débiteur".
Which Dessain and Wilkins translate as:
-When the guarantor pays the creditor, it is subrogated as regards all the rights and actions that he could have taken against the debtor-;
(v) In Houard's Dictionnaire de Doit Normand 1780, there is an entry for -subrogation-. Although Houard appears to deal with subrogation in the context of succession, he does not suggest that the principle is limited to succession or that it cannot be applicable in other contexts (eg insolvency). The relevant entry provides that:
"La Coutume de cette Province, art.278, permet au créancier, dont le débiteur renonce ou qui ne veut pas accepter une succession qui - lui échet, de se saire subroger & de l'accepter en son lieu & place".
Which may be translated as:
-The Custom of this Province, Art. 278, permits a creditor whose debtor renounces or who does not want to accept a succession which is due to him to have it subrogated and to accept it in his place.- [That is, the creditor can discharge the debtor's obligation and take the corresponding right(s) eg a security right.];
(vi) Pothier, in his Traité des Obligations, describes subrogation. Paragraph 281 provides:
"Le débiteur solidaire qui, en payant, a requis la subrogation, est, pour Ie surplus de ce dont il étoit débiteur pour soi-meme et sans recours, subrogé aux·actions du créancier, non seulement contre ses codebiteurs, mais contre leurs cautions, s'ils en ont donné au créancier - il est subrogé a tous les privileges et a tous les droits d'hypotheque attachés aux actions du créancier; et il peut les exercer meme contre les tiers, comme l'auroit pu Ie créancier, dont il est Ie procurator in rem suam...".
This may be translated as:
-The debtor in solido [ie co-debtor or co-guarantor], who on paying the debt requires a subrogation, is, as to the surplus, beyond his own share subrogated not only against his co-debtors, but also against their sureties - if they have given any to the creditor, he is likewise subrogated, to all the privileges and rights of hypothecation attached to the action of the creditor; and he may even exercise them against third persons, in the same manner as the creditor to whom he is procurator in rem suam [assignee and able to sue in his own name in respect of any right previously enjoyed by the creditor] might have done...-; and
(vii) the term -subrogation- is used in Jersey statutes. One example is the Social Security (Jersey) Law 1974 where there is a specific Article 26I titled -Subrogation- which deals with the Minister's entitlement to be -subrogated-.
42. Since the hearing on this matter we asked for further submissions on the case of Barclays Bank Limited v The DuPont Pipe Company Ltd (1961) 253 Ex 204. This case appeared to us to deal with subrogation in Jersey law. The reference in the Tables des Décisions 1959-1963 to that case reads as follows:
-SUBROGATION.
EN DROIT LA SUBROGATION SE FAIT
DANS LES CAS SUIVANTS:
1°, en vertu de la loi seule ; 2°, en vertu de la réquisition
qui en est faite au créancier ; 3°, en vertu de la convention avec
le créancier ; et 4°, en vertu de la convention avec le
débiteur. L'action de la société actrice
n'étant accompagnée d'aucune de ces conditions,
jugé que les faits énoncés dans l'Ordre de Justice
ne sauraient donner lieu à la subrogation.
'Barclays Bank Limited' v. 'The DuPont Pipe Company Ltd.' (1961) 253 Ex. 204.
Et voir -Quasi-contrat.-
43. As already noted in Dessain and Wilkins Insolvency and Asset Tracking 5ed the learned authors observed that the Viscount had a practice of accepting subrogated claims in limited instances. They cite Barclays v DuPont as authority for the proposition that -normal contractual principles will apply- in matters of subrogation.
44. While the claim for subrogation appears to have failed in Barclays v DuPont, the Representors submit that the case adds weight to the overriding submission that subrogation as a concept clearly forms part of Jersey law. The claim failed not because the remedy did not exist but because the Royal Court found on the facts that it did not fall within one of the gateways for a claim in subrogation as the Court then found those gateways to exist.
45. The gateways, per Barclays v DuPont, by which a claim in subrogation could arise are - (i) by operation of law; (ii) by demand of the creditor; (iii) by agreement with the creditor; or (iv) by agreement with the debtor. In that case none of these gateways or conditions were met, noting that it was a case where a Plaintiff was asserting a positive standalone claim by way of Order of Justice.
46. The Representors submit that on the Corporate Guarantees, subrogation arises by operation of law, and also by agreement with the creditor. In this regard:
(i) Clause 10.2 of the First Corporate Guarantee provides that:
-Until the Secured Liabilities are discharged in full, the Guarantor waives all of its rights of subrogation-;
(ii) Clause 10.2 of the Second Corporate Guarantee provides that:
-Until the Secured Liabilities are irrevocably and unconditionally paid or discharged in full, each Guarantor irrevocably and unconditionally waives all of its rights to be subrogated to any rights of BoS howsoever arising or to be entitled to any right of a guarantor or surety in competition with BoS-;
(iii) both of these clauses seek to defer rights of subrogation, pending payment in full of the guaranteed/secured creditor; and
(iv) the above clauses represent a clear recognition and agreement of a subrogation right as between the Companies. If the draftsman was in any doubt as to the existence of subrogated rights, the clause would not have said -all of its rights to be subrogated- but rather -any and/or all of its rights to be subrogated-.
47. Alternatively, the Representors submit that subrogation arises by operation of law. In this regard:
(i) the Corporate Guarantees constitute agreements between the Companies both inter se and vis-à-vis LBG (ie the creditor). However, there is no explicit right to subrogation under the terms of the Corporate Guarantees;
(ii) the Netting Law requires the Liquidators to give effect to the Corporate Guarantees as a matter of law. The consequences of doing so are that the assets of certain of the Companies had to be used to pay the debts of other Companies; and
(iii) the law must provide a mechanism to resolve the intercompany claims arising in the circumstances described above. The principles of subrogation are the correct ones to apply in such circumstances.
48. Barclays v DuPont can be distinguished from the present case in that it concerned a standalone cause of action being pursued by the Plaintiff bank on the basis of subrogation. The present case is concerned with intercompany claims that have come into existence by operation of the law where the Liquidators are seeking to exercise their powers and discretions, and are seeking the Court's approval of their methodology.
49. The Representors further submit that principles of subrogation are the appropriate ones to apply to resolve the intercompany claims. The doctrine of subrogation is well established in Jersey law and, Barclays v DuPont is an example of this. The Representors argue that contemporary developments and clarifications in English law post Barclays v DuPont (most notably the Cheltenham Principles referred to below) are of more assistance in the Jersey analysis today.
50. In the light of the factors set out above and the case of Barclays v DuPont, it is clear that subrogation exists as a matter of Jersey law. The effect is that where Person A is owed a debt by Person B, and Person C discharges that debt, Person C steps into the shoes of Person A. Following subrogation, whatever rights Person A enjoyed, those rights will now be enjoyed by Person C.
51. Any rights in the subrogated creditor's hands are subject to the same limitations that they would have been subject to previously (in the original creditor's hands). In practice, we agree that this means:
(i) if the original creditor was secured to a particular value, the subrogated creditor can only be secured to that value. That is so even if the debt owed to the subrogated creditor exceeds the value that was secured to the original creditor; and
(ii) the subrogated creditor only steps into the original creditor's shoes, to the extent that the debt owed to the original creditor is discharged by the subrogated creditor.
52. The Representors also put before us the leading English case on the operational aspects of subrogation, namely Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291. They argue that although of different origins, the effect of the doctrine under English law and Jersey law is the same.
53. Cheltenham analysed the doctrine of subrogation (as a matter of English law) as comprising a number of principles. Not all of the principles are of equal assistance but the Representors refer to the following Cheltenham principles (-the Cheltenham Principles-) as helpful in this case:
(i) Principle 3:
-...subrogation is a flexible remedy, which nonetheless must be applied in a principled fashion...-;
(ii) Principle 10:
-...subrogation cannot be invoked so as to put the lender in a better position than that in which he would have been if he had obtained all the rights for which he bargained...-; and
(iii) Principle 12:
-...the capital sum in respect of which a lender is subrogated cannot normally be greater than the amount of the secured debt that has been discharged-.
54. We do not propose to go through the technical workings of the Proposed Model. We have reviewed the explanations set out in the papers.
55. The Proposed Model is comprised of an MS Excel workbook. The four principal MS Excel worksheets are:
(i) -Distributions- - this shows the steps (broken down into steps 1 - 5) which culminate in the distribution of a final dividend to creditors. This is the primary worksheet of relevance insofar as it outlines the Proposed Model from beginning to end. The other worksheets (ie (b) to (d) below) feed data into the -Distributions- worksheet;
(ii) -LBG Debt- - this shows information in respect of the Bank's overall debt and the process undertaken by the Bank in consolidating its debts;
(iii) -Subrogations- - this shows the detail of each of the subrogations which are reflected in step 4 of the -Distributions- worksheet. That is, step 4 of the -Distributions- worksheet reflects the overall position set out in the penultimate table of the -Subrogations- worksheet; and
(iv) -Creditors- - this shows the value of claims of intercompany creditors and Third Parties.
56. In outline, the steps plan reflected in the Proposed Model (see the -Distributions- worksheet) is as follows:
(i) steps 1 - 3 give effect to the Corporate Guarantees;
(ii) step 4 sets out the subrogation position after effect has been given to the Corporate Guarantees; and
(iii) step 5 sets out the series of distributions which are to be made - (i) as between the Companies, as a consequence of the subrogated claims; (ii) to the Liquidators in respect of their fees; and (iii) to Third Parties.
57. The Representors submit that the following questions arise:
(i) whether the Representors are correct to distinguish - for purposes of subrogation - between secured and unsecured subrogated claims? That is, when a Company discharges another Company's debt, the Proposed Model tracks whether the debt was secured (in which case it would give rise to a secured subrogated claim) or not (in which case it would give rise to an unsecured subrogated claim). That appears to be consistent with Principle 10 above, in that discharging an unsecured debt gives rise to an unsecured subrogated claim because the paying Company (through subrogation) cannot be put in a better position than LBG would have occupied opposite the debtor Company;
(ii) whether the Representors are correct that the quantum of a Company's subrogated claim is limited to the actual amount of debt discharged by that Company? That is, if one Company discharged £50 in respect of an obligation to pay £100, then the Company has a subrogated claim of £50, not £100. That appears to be consistent with Principle 12 above; and
58. The Proposed Model rests on the assumption that the Representors are correct to distinguish between secured and unsecured claims and are entitled to determine a de minimis level after which no further re-allocation calculations are necessary. We agree with this approach.
59. The Representors have the power to distribute under the Proposed Model - but come before this Court in the light of the complex issues of subrogation and netting, which appear not to have expressly come before the Court previously. It is urged on us that there is a public interest in the Court setting out guidance on the application of the Netting Law and subrogation as this would be of benefit to other liquidators faced with intercompany claims.
60. We can see the benefit in such an approach but we repeat that we have not heard contrary argument on any aspect and accordingly any guidance that this judgment may contain and its authoritative weight is inevitably of limited value.
61. As to the appropriate test to be applied to the exercise of the Court's discretion, in Representation of Anthony Investments (Esplanade) Ltd [2014] JRC 240B the Court determined that (on the facts of that case) the liquidators' decision was justifiable - (i) as a matter of the Court's own discretion; and (ii) on the basis that it was a decision which was not taken in bad faith and was not a decision which no reasonable liquidator would take (Representation of Anthony Investments (Esplanade) Ltd, paragraph 48). The Court did not indicate whether the appropriate test was (i) or (ii) or both (i) and (ii).
62. It is submitted by the Representors that the appropriate test is whether the liquidators' decision was taken in bad faith or is a decision which no reasonable liquidator would take. We agree. Such an approach appears consistent with the statement of the Royal Court in Re Golden Sphinx Limited [2023] JRC 106 (at paragraph 37) where the Court said:
-...we think it right to add to our decision just given that it would be appropriate for the Respondents to apply at this stage for a direction pursuant to Article 186A of the Law, to seek approval of the steps which the Respondents intend to take in litigation in Jersey or in other jurisdictions. In our view, it would be inappropriate to convene the Representor to any such application insofar as the application concerns litigation hostile to his position. Inevitably, it would be necessary for the Respondents to set out in any such application the merits and demerits of the proposed action, as they are advised at that time. The purpose of the application, as we currently see it, is not to advise the Respondents as to what action they should or should not take; but rather to ensure that, given the special status which liquidators have in most other advanced jurisdictions, this Court can be satisfied that, in the circumstances of this case, which as we have said we regard as essentially litigation between two warring creditors of the Company, no unfair advantage is obtained by one of those creditors through her appointment and payment of these liquidators. It goes without saying that approval of any such action [ie the commencement of litigation], whether in Jersey or other jurisdictions, would not amount to an endorsement of the merits of the action [ie the commencement of litigation] in question of itself - and given the possibility that much of the litigation may yet occur in Jersey, it is also necessary that a different Court be constituted to deal with that litigation than with any application under Article 186A-.
63. Re Golden Sphinx Limited does not suggest that it would be appropriate for the Court to exercise its own discretion, ie for the Court to take the decision itself for the Representors, but rather verifying that there was no bad faith and that the decision is not one which no reasonable liquidator would take.
64. Further, in Representation of Anthony Investments (Esplanade) Ltd ( paragraph 33) the Court will usually sanction a liquidator's decision:
-if it is in the best interests of all the creditors of the company and that the liquidator's view as to the creditors' best interests will normally be given considerable weight-.
65. We agree with the Representors' submission that having regard to the Article 186A jurisprudence outlined above, the following considerations assist the Court in determining whether sanction is appropriate. Those considerations are -
(i) what is the Representors' decision;
(ii) what are the merits and demerits of the proposed decision;
(iii) do the Representors consider the decision to be in the interests of creditors;
(iv) is the decision in the best interests of the creditors having regard to the Representors' view;
(v) is the decision taken in bad faith; and
(vi) is the decision one which no reasonable liquidator would take?
67. As Mr Yuill explains in his affidavit, the Proposed Model is based on the actual steps taken by LBG, pursuant to the Corporate Guarantees.
68. Even so, the Liquidators considered alternative scenarios to see whether there was another way to achieve a fairer outcome for unsecured creditors. This is dealt with in some detail in the EY Internal Memorandum. We do not propose to set out this analysis herein. We are satisfied that they are not as satisfactory as the Proposed Model which takes into account both the Netting Law and subrogation. This is not only because they rely on hypothetical actions which LBG could have taken but did not do so, but also because the Proposed Model has - in our submission - a credible legal foundation, whereas the alternative scenarios ignore the Netting Law and subrogation.
69. It is fair to observe that a demerit of the Proposed Model may be said to be its complexity. It is complex and there are prima facie simpler approaches. The Proposed Model does, however, have virtues that simpler approaches do not.
70. In our view the merits of the Proposed Model outweigh the demerit of its complexity.
71. The Representors hold the belief, as is confirmed in Mr Yuill's affidavit, that the Proposed Model is in the interests of the creditors.
72. The Representors submit that applying the methodology set out in the Proposed Model is in the best interests of the creditors, because:
(i) it proceeds on the basis of facts as opposed to assumptions or re-engineering and therefore does not confer arbitrary preferences for some creditors over others;
(ii) it returns cash into the hands of the guarantor Companies which were compelled to satisfy guaranteed obligations of other Companies to LBG in circumstances where the guarantor Companies had little or no principal debt obligations to LBG;
(iii) it is supported by 88% of the unsecured creditors (as a proportion of unsecured debt across the Companies); and
(iv) it takes proper account of principles of netting and subrogation.
73. There is no evidence to suggest bad faith. The Representors are experienced and regulated professionals. They are approved by the Viscount to hold office as Jersey liquidators.
74. The Representors submit the decision to distribute in the way and applying the methodology set out in the Proposed Model is reasonable and not one which no reasonable liquidator would take. The Representors have acted reasonably by taking legal advice, developing the Proposed Model in conformity with that advice and testing the model in the manner described in Mr Yuill's affidavit.
75. We note that notice has not been given to the secured creditor nor the priority preferential creditors, since they have been paid in full and, accordingly, have no interest in the outcome of this application.
76. The Representation is, however, brought on notice to interested unsecured creditors. That is, the major unsecured creditors whose claims comprise 99% of the unsecured debt across the Companies and who would have a material interest in the outcome of this Representation. A draft of the Representation was delivered to interested unsecured creditors. A final version of the Representation along with notice of the date fixed for the hearing before us was also delivered to interested unsecured creditors.
77. A number of the unsecured creditors (88% by reference to the value of their claims) have indicated support of the Representation. The Representation includes written consent from such creditors to this effect. No creditor has given notice of an intention to oppose.
78. We are, as we have said, grateful to counsel for the Representors for what we believe to be the thorough exposition of the legal principles before us which have enabled us to reach the conclusions that we have. We have drawn heavily on the statement of the legal principles and law on the Representors' written submissions before us.
79. The Court is satisfied on the basis of the arguments put to us that it has jurisdiction, and the methodology proposed by the Representors is the correct one.
80. We are also satisfied that the Proposed Model, in the light of the settlement in full of all the secured debts and the payment of a significant dividend to the unsecured creditors, none of whom have formally objected to the approach proposed by the Representors, is a fair and appropriate one.
81. Accordingly, we make the orders sought in the draft final order.
Authorities
Companies (Jersey) Law 1991.
Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005.
AAA Holdings Limited [2009] JRC 110.
Rep of Roberts and Pirouet [2011] JRC 166.
Re Royco Investment Company Limited [1994] JLR 236.
Guidon Investments Ltd v Malet de Carteret 1980 J.J. 109.
Dessain and Wilkins Insolvency and Asset Tracking 5th Edition.
Le Gros, Traité du Droit Coutumier de L'Isle de Jersey.
Houard, Dictionnaire de Doit Normand 1780.
Pothier, Traité des Obligations.
Social Security (Jersey) Law 1974.
Barclays Bank Limited v The DuPont Pipe Company Ltd (1961) 253 Ex 204.
Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291.
Representation of Anthony Investments (Esplanade) Ltd [2014] JRC 240B.
Re Golden Sphinx Limited [2023] JRC 106.