Cayman Islands Court considers when a secured creditor can sue debtor company in liquidation
In the recent decision of Re Adenium Energy Capital, Ltd. (In Official Liquidation), the Grand Court of the Cayman Islands considered the circumstances in which its permission was required for the pursuit of legal proceedings against a company in liquidation.
In Re Adenium, the company transferred property, purportedly pursuant to the terms of a security agreement, to the nominee of the secured creditors during the period between the filing of the winding up petition and the making of the winding up order. The Companies Act provides that dispositions of company property during this critical window are void unless the Court otherwise orders. Accordingly, the company’s liquidators subsequently sought declarations that the transfers of property were void and, in response, the nominee sought declarations that the transfers were valid.
The Companies Act also provides a company in liquidation with the benefit of a moratorium on legal proceedings, albeit the Court can grant permission for the legal proceeding to proceed. The underlying policy rationale of the moratorium is to allow the liquidators to wind up the company efficiently and for claims against the company to be dealt with via the proof of debts process. Generally, permission is not required where the legal proceeding is "defensive" in nature, and a secured creditor does not require permission to enforce its security.
The key question before the Court in Re Adenium was whether the nominee required the Court’s permission to seek its own declarations against the company in circumstances where (1) the nominee argued that it was doing no more than defending the liquidators’ proceeding by seeking mirror opposite declarations and (2) the transfers that were the subject of the declarations was said to have occurred pursuant to a security agreement.
The Court held that leave was required because pursuit of the declarations, rather than simply defending the liquidator’s claim for declarations, was a sufficiently active and not defensive step. Further, the Court found that permission was required even where a legal proceeding related to a security (whereas simply enforcing the security through out-of-court processes does not fall within the scope of the moratorium at all). The Court then granted permission to the nominee to seek the declarations affirming the validity of the transfers because it would not be fair to deny that permission given that the liquidators had cast doubt on the validity of the security underlying the transfers.
