Deloitte & Touche AG v Christopher D. Johnson and Another
| Jurisdiction | UK Non-devolved |
| Judge | Lord Millett |
| Judgment Date | 10 June 1999 |
| Judgment citation (vLex) | [1999] UKPC J0610-1 |
| Court | Privy Council |
| Docket Number | Appeal No. 44 of 1998 |
| Date | 10 June 1999 |
[1999] UKPC J0610-1
Present at the hearing:-
Lord Slynn of Hadley
Lord Hope of Craighead
Lord Hobhouse of Woodborough
Lord Millett
Sir John Balcombe
Privy Council
[Delivered by Lord Millett]
The question for decision in this appeal is whether a debtor or alleged debtor of a company in liquidation can apply for the removal of a liquidator, in whom the creditors and contributors of the company appear to have confidence, on the ground that he is subject to a conflict of interest. There is also a related question on which the appellants petition for special leave to appeal. This is whether the defendant to an action brought by a company in liquidation can ask the court to restrain the liquidator from prosecuting the action on the like ground.
The proceedings arise out of the liquidation of Omni Securities Ltd. ("the Company"), a company incorporated in the Cayman Islands and a member of the Omni Group of companies. The Company was placed in voluntary liquidation in November 1991. By an order of the Grand Court of the Cayman Islands in March 1992 the liquidation was ordered to continue subject to the supervision of the court. A liquidation committee was formed in May 1996. The respondents to the present appeal are the joint liquidators of the Company. They are partners of the Cayman Islands practice of Coopers & Lybrand. An associated practice Coopers & Lybrand (Switzerland) is one of the liquidators of the Company's ultimate holding company.
In March 1995 the respondents caused the Company to bring proceedings in the Grand Court of the Cayman Islands (Cause No. 104 of 1995) against a number of defendants alleging negligence in the audit of the Company's financial statements for the years 1988 and 1989. The Cayman Islands practice of Deloitte Haskins & Sells (now Deloitte & Touche) were the Company's auditors. The field work relating to the audit of the Company's 1988 and 1989 financial statements was carried out in Switzerland on their behalf by the appellants, an associated firm carrying on business in Switzerland and then known as Deloitte Haskins & Sells AG (now Deloitte & Touche AG). The appellants also signed off the audit report for the Company's financial statements for 1990. They are the eighth defendants in Cause 104. The other defendants are all parties connected with the Cayman Island practice. The audit of most of the other companies in the Omni Group was carried out by the associated United Kingdom practice ("DH&S UK"). The appellants allege, and for the purposes of the present appeal the respondents accept, that if there was negligence in the audit of the Company's financial statements as alleged, DH&S UK were at fault in failing to provide the appellants with material information.
The writ in Cause 104 was served on the appellants in March 1996. They promptly applied by originating summons for an order removing the respondents as liquidators of the Company or alternatively restraining them from continuing the conduct of the proceedings against them by reason of their conflict of interest. No less promptly the respondents issued a summons to strike out the originating summons on the grounds that the appellants had no locus standi or real interest in applying for the relief sought. Smellie J. dismissed the respondents' summons, but the Court of Appeal allowed the respondents' appeal and struck out the appellants' originating summons. The appellants now appeal to their Lordships' Board.
The appellants allege that the respondents are subject to a conflict of interest which arises in this way. In 1990 most of the international practices of Deloitte Haskins & Sells merged with those of Touche Ross to form the international organisation now known as Deloitte & Touche. DH&S UK, however, did not join the new group, but merged instead with the United Kingdom practice of Coopers & Lybrand, and now forms part of the international organisation of Coopers & Lybrand. The appellants contend that the fact that the respondents are partners in a firm which is a member of the same international organisation as DH&S UK (now Coopers & Lybrand UK) gives rise to a serious conflict of interest. The appellants complain that the respondents cannot carry out their functions as liquidators of the Company properly and impartially when the actions they take could have a significant bearing on the potential liability of their associates at Coopers & Lybrand. In particular they cannot be perceived to have given proper consideration to the question whether the Company should make a claim against Coopers & Lybrand UK or join them as defendants to Cause 104.
The appellants draw particular attention to the history of the proceedings in Cause 104 so far. The writ alleges that the defendants were guilty of negligence in relation to both the 1988 and 1989 audits. This would expose Coopers & Lybrand (UK) to the risk that the appellants would bring them into the action as third parties, particularly, it seems, in relation to the 1988 audit. The statement of claim, however, makes no allegations in relation to the 1988 audit. The appellants allege that this indicates a tailoring of the case by the respondents in the interest of their associated firm rather than in the interests of creditors of the Company.
The respondents deny that there is any conflict of interest, but they accept that, this being an application to strike out the proceedings, the court must proceed on the footing that the appellants' allegations are true. The question on the appeal, therefore, is whether the appellants, who are neither creditors nor contributories, have any locus standi to invoke the statutory jurisdiction of the court to remove the respondents as liquidators of the Company. The question on the petition for special leave to appeal is whether, as defendants to existing proceedings, the appellants can invoke the inherent and supervisory jurisdiction of the court over its own officers to restrain the respondents from proceeding further with Cause 104. Their Lordships will consider these questions separately.
1. The statutory jurisdiction to remove a liquidator.
The companies legislation which was under consideration by the Court of Appeal was the Companies Law (1995) Revision. The legislation has since been consolidated and revised as the Companies Law (1998) Revision. The parties are agreed that there are no material differences between the two, though the section numbers have been altered as a result of the addition of a new section 4 in the 1998 Revision. Their Lordships will refer to the provisions of the 1995 Revision. The legislation is based upon the English Companies Act 1862.
Section 106(1) provides:-
"(1) Any official liquidator may resign or be removed by the Court on due cause shown; and any vacancy in the office of an official liquidator appointed by the Court shall be filled by the Court."
It is common ground that this section applies not only to a compulsory liquidation but also (by virtue of section 153) to a liquidation which is continuing subject to the supervision of the court. The corresponding section which applies to a voluntary winding up is section 143. This provides:-
"143. If, from any cause whatever, there is no liquidator acting in the case of a voluntary winding up, the Court may, on the application of a contributory appoint a liquidator or liquidators; and the Court may, on due cause shown, remove any liquidator and appoint another liquidator to act in the matter of a voluntary winding up."
Their Lordships make two observations on these sections. In the first place, each of the sections has two limbs, one enabling the court to appoint a liquidator to fill a vacancy, and the other enabling it to remove a liquidator for cause. In the second place, save in the case of the appointment of a liquidator in a voluntary winding up where the application must be made by a contributory, there is no express restriction on the category of person who may make the application. Where an insolvent company is being voluntarily wound up, it appears that a creditor who wishes to...
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