In a judgment delivered on 31 January 2022, His Honour Deemster Corlett outlined the court’s expectation that a liquidator would seek funding primarily from the petitioner who sought their appointment and would monitor the viability of its source of funding, even in cases where funds are realised in the liquidation which could be used for payment.

In the matter of Broadsheet LLC (in liquidation) (CHP21/0038) (31 January 2022) concerned an application by the court appointed liquidator for authorisation to hold funds in his liquidator’s bank account rather than paying them into court, for amendments to the original order appointing him as liquidator and for directions for future payment and retrospective approval of existing payments to cover the liquidator’s fees and legal costs from fund under his control.

This application was contested by three entities described by the court as “litigation funders”, either partially or in its entirety. The background to this liquidation was somewhat complex and will not be recited in detail here, but in summary, Broadsheet LLC (“the Company”) was originally wound up in March 2005 and dissolved in April 2007. The Company was subsequently restored to the register in November 2009 by a Gibraltan company International Asset Recovery Limited (“IAR”) for the purposes of recovering outstanding fees by way of arbitration proceedings.

The appointed liquidator funded the arbitration proceedings using contributions from the litigation funders and around USD $30 million was ultimately recovered. However, a dispute arose between the Company and one of the litigation funders, resulting in a further referral to arbitration which has yet to be resolved.

The litigation funders argued that the liquidator’s application could not be properly dealt with until conclusion of the arbitration proceedings and resolution of an application by one of the funders to determine the status of certain transactions. They took issue with the decision to seek payment from the funds recovered in the first set of arbitration proceedings, instead submitting that the liquidator ought to be funded by IAR as a consequence of the terms of the order appointing the liquidator.

When delivering judgment, His Honour Deemster Corlett provided a clear warning to liquidators that, where an entity had agreed to fund a liquidation, there was an expectation a liquidator would secure funding from that source primarily and should monitor the ongoing status of the funding entity, to avoid a scenario where the funding creditor ceases to exist and a liquidator is left without funds to progress the liquidation [9 – 11].

Whilst in this scenario, the liquidator theoretically had access to the arbitration award to fund his services, it should not be assumed the liquidator would be permitted to fund his services in this manner where he had failed to make attempts to secure alternate sources of funds.

Likewise, a liquidator should expect to have to justify payments made on the Company’s behalf in the liquidation and to provide a clear rationale to the court explaining the basis for the payments [22 – 30].

One of the litigation funders also sought to remove the liquidator, or add a co-liquidator to act jointly. In doing so, the litigation funder relied upon evidence of very substantial payments being made by the liquidator without court approval, seemingly in contravention of a contractual agreement, and upon other alleged material deficiencies in the way in which the liquidation was conducted. The litigation funder had not brought this application by way of formal application notice due to a theoretical argument that it lacked standing under s189 (1) of the 1931 Companies Act because it was not technically a creditor or contributory of the Company.

However, the court was quick to dismiss this suggestion on the basis it was “unduly technical and lacking in substantive merit”. His Honour indicated that the removal of a court appointed liquidator is such a serious step that it ought to be the subject of a formal application, notwithstanding the potential jurisdictional challenge, and that therefore he would not deal with the application. That said, he provided obiter commentary on the merits of such an application, concluding that he did not consider removal of the liquidator appropriate as it was desirable to retain the status quo unless concerns about the liquidator’s actions were significant. Whilst unexplained, he indicated that on the evidence before him, he was not satisfied the liquidator’s actions were sufficiently concerning to replace him.

However, the contents of this judgment serve as a reminder to liquidators of their court appointed status and that the Isle of Man courts will not hesitate to intervene in circumstances where it is considered a liquidator has over-stepped his remit. It also serves as a reminder to liquidators that the onus is on them, where a petitioner has agreed to fund a liquidation, to ensure they are placed in funds to pay for the liquidation and to monitor the status of the funding entity to ensure this source of funding remains viable.

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The guidance in this note is for information purposes only and is not intended to be exhaustive. It is not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Cains only advises on the laws of the Isle of Man and accepts no responsibility for any errors, omissions or misleading statements or for any loss which may arise from reliance on the information in this note.