ARTICLE
16 April 2024

Not The Time Or Place: Important Considerations For Proof Of Debt Appeals

Justice Parker's decision of in North Sound Pharmaceuticals Inc concerns an appeal against the rejection of a proof of debt in a liquidation.
Cayman Islands Insolvency/Bankruptcy/Re-Structuring
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Justice Parker's decision of in North Sound Pharmaceuticals Inc concerns an appeal against the rejection of a proof of debt in a liquidation. The judgment highlights a number of procedural and practical considerations for would-be appellants and their advisors alike.

The Appellant was the former and sole director and a substantial shareholder of North Sound Pharmaceuticals Inc (the Company). Following a failure by the Company to satisfy a statutory demand, the Appellant entered into an employment agreement with the Company that conferred him with a substantial salary in addition to a severance payment of US$6 million. On the same day that the winding up petition was filed, the Appellant signed the employment agreement in his capacity as director on behalf of the Company and countersigned in his personal capacity as employee.

The Liquidators rejected the vast majority of sums contained in the Appellant's proof of debt for a variety of stated reasons, including that the employment agreement was invalid, was entered into in breach of fiduciary duty and constituted a voidable preference. The Liquidators also argued that the employment agreement was void pursuant to s 99 of the Companies Act (2023 Revision) as it was entered into after the commencement of the winding up and was not sanctioned by the Court.

On appeal, the Court determined that the employment agreement was valid, noting it was supported by consideration and that the Appellant was acting as an employee at all material times. The Court recorded at paragraph 98 that: "The fact that the appellant was a director with a significant, but not majority or sole shareholding, does not prevent a claim succeeding against an insolvent company on the basis that he was an employee of that company."

The Liquidators also argued that the Appellant acted in breach of his fiduciary duties in that he entered into the employment agreement at a time when he knew the Company would not be able to settle the statutory demand.

Further, the Liquidators asserted that it was not in the Company's best interests to enter into the employment agreement. However, a properly particularised claim for breach of fiduciary duty was not brought against the Appellant. The Court noted that had a properly formulated claim been brought, the proof of debt appeal was not the appropriate forum to do so, given that it is “… a summary process which examines the affidavit evidence and the documents, without cross examination and disclosure, and is not the proper forum to determine any claims that involve contested factual questions.” The Court similarly held that the Liquidators' claim that the employment agreement constituted a voidable preference had not been properly particularised and that, again, the appeal was not the appropriate forum to adjudicate such a fact-dependant claim.

Justice Parker also rejected the Liquidators' argument that the employment agreement was entered into after the filing of the winding up petition. His Lordship observed that the petition was uploaded to the Court's online filing system after close of business. Accordingly, the petition was deemed to have been filed the following day under the relevant Practice Direction, rather than on the same day the employment agreement was entered into.

The Court ultimately allowed the appeal and held that the debt was preferential for the purposes of s141 of the Companies Act, as it was a debt owed to an employee. The judgment serves to highlight that the summary nature of the proof of debt appeals process is not appropriate for strongly contested disputes as to fact. It also provides a useful reminder of the importance of timing when filing documents with the Court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
16 April 2024

Not The Time Or Place: Important Considerations For Proof Of Debt Appeals

Cayman Islands Insolvency/Bankruptcy/Re-Structuring

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