The Supreme Court of The Bahamas has recently provided guidance on the ability and extent to which the fees and expenses of the liquidator may be paid from trust property. Such guidance has emanated from Justice Winder and Justice McKay in two separate decisions relating to Pacifico Global Advisors Limited (in liquidation) (“Pacifico”) delivered within the period of six months[1].
Pacifico is a Bahamas based broker dealer registered with the Securities Commission of The Bahamas since 2012. It was placed into voluntary liquidation on 2 October 2019 and was subsequently ordered to be wound up under the supervision of the Court by a Supervision Order granted on 28 October 2019.
Prior to the commencement of liquidation, Pacifico provided discretionary portfolio management and investment advisory services to its clients. As a part of its service offering, Pacifico promoted a number of sub-funds which were segregated accounts (together the “Sub-funds”) of Lyford Diversified Global Fund, SAC (“Lyford Diversified”), a segregated accounts company which operated in The Bahamas as an open-ended investment fund, and for which Pacifico acted as investment manager and custodian.
Fifteen (15) of the Sub-funds were placed into receivership under the Segregated Accounts Companies Act shortly before Pacifico was placed into liquidation. This gave rise to an interesting twist with respect to the fees and expenses of the liquidator, which is discussed below. For ease of reference, the Sub-funds placed into receivership are hereafter referred to as the “Sub-funds in Receivership”.
At the commencement of its liquidation, Pacifico’s financial situation as assessed by the liquidator was as follows. First, the majority of the assets held by Pacifico comprised assets held for the benefit of its clients, as custodian. Second, there were four (4) categories of such clients, namely (i) clients who held investments in the Sub-funds in Receivership, (ii) clients who held investments in a Sub-fund which was not in receivership, (iii) clients who held investments outside of the Sub-funds entirely and (iv) clients who held investments both in and outside the Sub-funds. Third, the assets held by Pacifico in the Sub-funds in Receivership comprised 90% of the total assets held in its name.
In the first decision, McKay J considered an application by Pacifico’s liquidator for an order, inter alia, that 90% of the costs of the liquidation be paid from assets held by Pacifico in the Sub-funds in Receivership. One of the arguments advanced by the liquidator was that such assets constituted 90% of the total assets in Pacifico’s name and were trust assets which had required detailed analysis by the liquidator and his team, as a part of the liquidation, so as to identify the relevant beneficial owners in order for the assets to be properly distributed to them.
In The Bahamas, it is well established that the Court has an inherent equitable jurisdiction to order liquidators’ fees and expenses to be paid from trust property held by a company in liquidation provided such fees and expenses are reasonably incurred in returning the trust property to those beneficially entitled to it. It is also established that the Court has statutory power under section 204(3) of the Companies Act (as amended). Section 204(3) states:
“(3) Where in the course of the reasonable exercise of his functions as liquidator in relation to assets which the company in liquidation held upon a trust, expressed or otherwise, the liquidator –
(a) identifies or attempt to identify;
(b) recovers or attempts to recover;
(c) realizes or attempts to realize;
(d) protects or attempts to protect; or
(e) distributes such assets to the person or persons beneficially entitled,
the liquidator to the extent of such activities (or other activity in relation to such assets considered by the court to be beneficial to those entitled to them) shall be regarded as having acted in the administration of trust assets and the liquidator, subject to the approval of the court, shall be entitled to be indemnified out of those assets in respect of costs that are allocable to the said activities.”
The liquidator therefore relied on the common law and statutory power of the Court.
In determining the liquidator’s application, McKay J first considered whether the assets held by Pacifico were in fact “trust assets” and made a number of findings as follows. Firstly, the Court found that the directors of Lyford Diversified placed the Sub-funds into receivership by resolutions passed on 7 March 2019 and 8 April 2019, and the receivership was thereafter continued under the supervision of the Court on the application of the Receiver. Secondly, the Court found that by 28 May 2019, Pacifico had been terminated in its role as investment manager of the Sub-funds by the Receiver, after which Pacifico instructed its custodian bankers to transfer the assets of the Sub-funds in Receivership to certain accounts at Deltec Bank and Trust Ltd (“Deltec”). Pacifico was placed into voluntary liquidation on 2 October 2019 during the course of such transfer. Thirdly, the Court found that it had been agreed between the Receiver and Deltec that Deltec would be authorised to disburse the assets of the Sub-funds in Receivership to the persons entitled in cooperation with the Receiver. Such agreement was embodied in a Consent Order granted by the Court under which the Court directed that the only deduction to be made from the assets of the Sub-funds in Receivership should be the costs and expenses of the Receiver, as determined by the Court. Finally, the Court found that, given the termination of Pacifico as investment manager of the Sub-funds, Lyford Diversified did not intend for the assets of the Sub-funds in Receivership to remain with Pacifico, with the result that no trust was established in respect of those assets.
In coming to this conclusion, the Court noted that the liquidator wrongly disregarded the Receiver and Deltec, both of whom were capable to answer any questions of the liquidator in respect of the assets of the Sub-funds in Receivership. In addition, the Court noted that the liquidation and disbursement of the assets of three of the Sub-funds in Receivership had already been achieved in accordance with the protocol stipulated in the Consent Order. It therefore appeared that the liquidator’s detailed analysis of those assets was unnecessary. As McKay J put it, the liquidator acted “on a frolic of his own” in conducting himself as he did. The liquidator’s application for an order that the costs of the liquidation be paid from assets held by Pacifico in the Sub-funds in Receivership was accordingly dismissed.
In the second application, Pacifico’s liquidator again sought an order that the costs of the liquidation be paid from assets held by Pacifico which he regarded as “trust assets” but on this occasion the application specifically excluded the assets held by Pacifico in the Sub-funds in Receivership. The specific order sought included an order that the Court formally sanction the liquidator deducting or causing to be deducted from the trust accounts/assets held by Pacifico (excluding assets in the Sub-funds in Receivership) (i) such costs in the liquidation that are solely attributable to the identification, preservation, protection, recovery and distribution and administration of those trust assets and (ii) a percentage of the general liquidation costs (i.e. costs not solely attributable to the trust assets) since the trust assets currently constitute approximately 79% of the assets in Pacifico’s name and the general liquidation costs maintain the liquidation process and thereby enable the liquidator to attend to the trust assets.
In determining the second application, Winder J found that section 204 of the Companies Act (as amended) codified the common law position that where the company’s assets are insufficient to adequately compensate the liquidator for the skills and tasks performed in relation to client trust assets, the liquidator’s costs should be paid out of the trust assets. He also accepted that the liquidator had demonstrated an entitlement to receive payment for services provided directly towards the benefit of the trust assets concerned. The Court, therefore, granted an order permitting the liquidation costs solely and directly attributable to the administration of the trust assets to be deducted from those assets, subject to the caveat that the such costs must accord with the fees which Pacifico would otherwise have levied for its services had it not been placed into liquidation.
With respect to the general costs of the liquidation, Winder J accepted that the liquidator was permitted to receive a contribution from the trust assets but cautioned that trust assets cannot be “unduly burdened” with the general liquidation costs in circumstances where such assets are merely in Pacifico’s custody as custodian. Winder J indicated that in his view the percentage could not exceed 15% but reserved the Court’s decision in this regard as the application did not at that stage require an assessment of the percentage to be allocated.
Regrettably, as a result of these decisions of Winder and McKay JJ, the liquidator of Pacifico has found himself in an unenviable position. Not only is the payment of his fees uncertain but he is potentially exposed for expenses incurred by him to the extent that the assets of Pacifico are insufficient. The lessons to be learned include the following. A liquidator of a segregated accounts company should have due regard to any parallel receivership of a segregated account and cooperate with the receiver accordingly. In the case of any doubt, a liquidator would be wise to seek directions from the Court before acting in respect of assets subject to the receivership. Additionally, where a company is possessed of trust assets by virtue of a custodian relationship, a Court may limit the amount of liquidator’s fees and expenses attributable to the administration of those trust assets to the costs that would have ordinarily been paid to if the company had not been placed into liquidation.
[1] In the Matter of Pacifico Global Advisors Ltd., Supreme Court Action No. 2019/COM/bnk/00077 (unreported)
About the Author
Tara Cooper Burnside is a partner in the firm’s Insolvency & Restructuring practice group. She has detailed knowledge of the Bahamian insolvency regime and has worked on a number of cross-border insolvencies and restructurings. She is a Fellow of INSOL International.
*First published in INSOL International News Update, June 2021
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