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14 January 2021
The Royal Court recently handed down judgment in In the matter of CanArgo Limited (in liquidation) ( GRC064), bringing to an end an important chapter in a long-running dispute regarding control of the exploration and exploitation of the oil and gas reserves of Georgia. This judgment makes it clear that liquidators can approach the court to approve a significant decision that they have taken to enter into a transaction and that such decision is akin to a Public Trustee v Cooper blessing of a momentous decision in a trusts context. While the court will not allow liquidators to surrender their decision-making powers to the court, especially in a commercial context, it does have a supervisory jurisdiction over its officers and is available to bless the decision that the liquidators have taken even in the face of opposition from creditors.
MND Georgia BV was the first respondent in the proceedings and supportive of the joint liquidators' application made pursuant to Section 426 of the Companies (Guernsey) Law 2008 (Companies Law) for the court's approval of an agreement made between the company, the joint liquidators and MND for the purchase by MND of certain assets of the company (application).
The application was supported not only by MND, but also by two joint venture companies (JV respondents) owned jointly by the company and MND which were also creditors of the company. Conversely, the application was vehemently opposed by two other creditors of the company: Achernar Assets AG and Achernar Partners Limited (together Achernar).
The application was heard by Lieutenant Bailiff Marshall QC over the course of some six hearings in July, August and September 2020, with judgment being handed down on 23 October 2020. In her judgment, Lieutenant Bailiff Marshall comprehensively set out her reasons for granting the application.
The company was placed into compulsory liquidation and the joint liquidators were appointed to office by way of an order of the Royal Court dated 6 February 2018, all of which was the subject of an earlier judgment of the Royal Court (In re Canargo Limited, Royal Court Judgment 13/2018). The basis for the earlier application was the failure by the company to file audited financial accounts in accordance with its duties under Section 251 of the Companies Law, the first and only time this ground has been engaged in the context of a winding-up application in Guernsey.
Having been appointed to office, it soon became clear to the joint liquidators that the company had little in the way of liquid assets; rather, its material assets consisted of its shares in the two JV respondents and a third JV company (together with the JV respondents, the JV companies) and certain loan notes made between the company and the JV companies (the assets).
In addition to the assets, and key to its opposition to the application, Achernar alleged that the company also had a further asset – namely, a claim against MND for non-payment of deferred consideration (certain finance requests alleged to be payable in respect of the third JV Company (funding claim)). Among other things, Achernar argued that the sale of the shares in the third JV company to MND would prejudice the company's ability to bring the alleged funding claim.
The joint liquidators wrote to all interested stakeholders (namely, the shareholders and the creditors, including MND, Achernar and the JV respondents) to commence a bidding process for the purchase of the assets, in which MND was ultimately successful. The joint liquidators and MND then set about agreeing terms for the purchase by MND of the assets, which ultimately was formalised by way of a conditional asset purchase agreement (CAPA), the conditional element being that MND agreed to fund the joint liquidators' application to seek the approval of the Royal Court to their entering into the CAPA.
Lieutenant Bailiff Marshall's 28-page judgment closely analyses the history of the matter, on the evidence before the court, including, importantly, the negotiations which led up to the signing of the CAPA. The judgment then looks closely at:
While the detailed judgment requires reading in full to gain a proper understanding of the progress of the application and its various twists and turns, suffice it to say that (as noted by Lieutenant Bailiff Marshall) the strength of Archernar's opposition to the application was quite remarkable, with Achernar taking every available point (technical or otherwise) at every juncture to seek to have it dismissed. According to the judge, this suggested that Achernar had a wider interest in the outcome than simply improving its perceived prospects of maximising recovery of its claimed debt.
Lieutenant Bailiff Marshall noted that the joint liquidators had summarised the position that:
They further submitted that getting a proper and reliable valuation would in any event be an almost impossible task in light of the competing assertions with regard to the company's ability to sell the assets or to obtain payment of the loan notes. Any valuation of the assets would be deeply discounted to reflect the legal uncertainties. There was also, on any basis, a limited pool of potential purchasers for such specialist assets. Examination of such financial information with regard to the three JV companies' affairs as was available showed clearly that their respective financial positions were, prima facie, "deeply negative". Realistically, there was never going to be outside interest in the purchase; only those already involved with the enterprise would have any interest in making an offer.
A key consideration in the proceedings was the alleged funding claim mentioned above, which Achernar said they had drawn to the joint liquidators' attention prior to the CAPA being entered into with MND. Achernar argued that the joint liquidators had not properly investigated what Achernar alleged was a valuable claim. The joint liquidators' response was that they did not have the funds to investigate or seek professional advice in respect of the alleged claim, the merits of which were strongly refuted by MND.
Ultimately, Archernar's concerns regarding the alleged funding claim were addressed in the course of the proceedings by way of an amendment to the CAPA resulting in what became known as the 'third CAPA', as agreed between the parties to the CAPA. This became the subject of the application before the court, with Achernar having had time to consider it in the course of the proceedings. The effect of the third CAPA was simply to remove the sale of those assets pertaining to the third JV company, which the joint liquidators and MND argued protected the value of the alleged funding claim and kept it within the joint liquidator's control, enabling Achernar to facilitate the realisation of the value of that claim.
Ultimately, Lieutenant Bailiff Marshall was satisfied that the joint liquidators could not be said to have failed to give due weight as required by law to Achernar's views or consider them insofar as they otherwise ought reasonably to do, and that their final decision to enter into the third CAPA could not be characterised as perverse.
The court endorsed the view that Achernar's views did not appear to be those of a totally disinterested creditor and, in the end, the additional factor that the joint liquidators' decision could be said to defy the wishes of an apparent majority creditor (which Achernar asserted that it was) did not cause Lieutenant Bailiff Marshall to doubt that the joint liquidators had given due consideration to all material facts.
One interesting side note, which will no doubt be welcomed by insolvency practitioners, is Lieutenant Bailiff Marshall's stated view that the joint liquidators were not, in making their decision as to the way in which they thought it best to progress the litigation, obliged to ignore entirely their own interests. As liquidators, she considered that they did have their own interest in the estate of the company, in that their proper fees and expenses were recoverable from it, even in priority, in the liquidation itself.
Lieutenant Bailiff Marshall concluded her judgment by setting out some general principles which arose to be considered in the case, as follows:
Three particular points arising from the last requirement above may therefore need consideration, especially where the issue relates to a commercial transaction:
While 'blessing' applications made by trustees (known colloquially as 'Public Trustee & Cooper' applications) are well trodden territory in Guernsey and further afield, Lieutenant Bailiff Marshall's judgment in CanArgo and, in particular, her commentary on the general principles relating to analogous applications made pursuant to Section 426 of the Companies Law in an insolvency context, should prove to be helpful guidance for both lawyers and insolvency practitioners when contemplating engaging the Royal Court's jurisdiction in this way.
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