A recent decision of the Grand Court of the Cayman Islands1 considered the principles upon which a Cayman Islands exempted limited partnership ("ELP") may be wound up by the Court under its 'just and equitable' jurisdiction2, the Court's power under section 95(3) of the Companies Law to grant alternative remedies when hearing a winding up petition and to admit evidence after the release of a judgment but before the order is sealed.
Cybernaut Growth Fund, L.P. (the "Partnership") was an ELP invested in various operating companies in the People's Republic of China. Five of the six limited partners, together holding just under 50% of the limited partnership interests (the "Petitioners") presented a winding up petition against the Partnership pursuant to section 15(4) of the Exempted Limited Partnership Law (2012 Revision) (the "Law"), based on a justifiable loss of trust and confidence in the general partner's management of the Partnership. The general partner (the "GP") had become dysfunctional due to, amongst other reasons, a dispute between its principals involving allegations of misconduct and the GP's failure to provide audited financial statements and other financial reports as required by the limited partnership agreement (the "LPA") and the Law.
Although it was common ground between parties that the Partnership should be brought to an end, the petition was opposed by the GP and the other limited partner, which held just over 50% of the limited partnership interests ("Oriental") (together, the "Respondents"). The Respondents argued that the Partnership should be wound up in accordance with the voluntary liquidation provisions in the LPA and that the GP should act as voluntary liquidator.
Winding Up on Just and Equitable Grounds
It was not disputed that the Partnership could be wound up if there had been a justifiable loss of trust and confidence in the GP's management of the Partnership. The onus was on the Petitioners to establish the managerial misconduct by the GP alleged in the petition, such that the intervention of the Court was warranted. The Court found that, based on the evidence, the Petitioners were justified in bringing the petition. The Court placed particular reliance upon the GP's failure to provide proper financial transparency and the breakdown in the relationship between the principals of the GP.
The Respondents argued that, despite the Court's finding that there had been a justifiable loss of trust and confidence, the Court should exercise its residual discretion not to make a winding up order for the following reasons.
First, that the Petitioners were not seeking the benefit of a class remedy but were instead seeking a winding up order for an improper reason: to receive the benefit of a preference over Oriental because the LPA gave the Petitioners priority in the distribution of realisations of Partnership assets over Oriental. The Respondents argued that the Petitioners were seeking a winding up order not as a class remedy but to take advantage of this preference and therefore the winding up was not demonstrably for the benefit of the limited partners as a whole. The Court held that this argument did not justify refusing a winding up order as the mere fact that the financial circumstances of the Partnership were such that one limited partner may face a greater risk of losing its investment did not provide a basis for denying the Petitioners a winding up order. In any event, the GP's evidence was that the value of the Partnership's assets would be sufficient for Oriental to have an equal financial interest in the winding up of the Partnership with the Petitioners.
Secondly, that the Court should not interfere with the contractually agreed dissolution process set out in the LPA which provided that upon the termination of the Partnership the GP was to act as voluntary liquidator and the GP could only be replaced in the case of gross negligence, reckless disregard, wilful misconduct or bad faith. The Respondents argued that the Petitioners' case did not establish any of those matters and therefore nobody other than the GP was entitled to act as liquidator of the Partnership. Again the Court was not persuaded by this argument and concluded that the events which had occurred prior to the filing of the petition led to the conclusion that the GP was dysfunctional and that it had demonstrated that it was incapable of taking even basic steps which were necessary to dissolve the Partnership.
Thirdly, that the Petitioners had alternative remedies.3 The Respondents argued there were three alternative remedies open to the Petitioners: (1) an offer would be made by the Respondents' to purchase the Petitioners' partnership interest (although as it turned out no such offer was actually made prior to the conclusion of the trial); (2) the enforcement of the Petitioners' statutory and contractual rights of access to the Partnership's books and records; and (3) a voluntary liquidation pursuant to the LPA with the GP acting as liquidator. Jones J did not find these alternative remedies viable and in the circumstances considered that they did not justify the Court exercising its discretion to refuse to make a winding up order.
The Court therefore ordered that the Partnership be wound up.
Post Judgment Applications
The Court provided the parties' attorneys with a draft of its written judgment on 29 August 2013, in accordance with its usual practice. At the hearing to hand down the judgment, the GP made an application for: (a) leave to adduce evidence of discussions relating to a potential buy-out of the Petitioners' limited partnership interests by the Respondents; and (b) an order pursuant to section 95(3)(d) of the Companies Law (2012 Revision) (as an alternative to a winding up order) for the purchase by the GP and/or Oriental of the Petitioners' partnership interests.
It was not disputed that a trial judge has a discretion to receive new evidence after a judgment has been given, but before the Court's order has been sealed. Jones J adopted the position set out in the English decision Charlesworth v Relay Roads Ltd4 as representing Cayman Islands law. The Charlesworth case held that a trial judge is entitled to take a more flexible approach in the admission of new evidence than the Court of Appeal, as set down in Ladd v Marshall5.
Jones J refused to admit the new evidence and found that "...it is obviously not new evidence at all. It is evidence which the Respondents decided to withhold from use at trial. It is only new evidence to the extent that it described the sequence of events taking place since trial, culminating in the buy-out offer made on 8 September." The buy-out offer made on 8 September following the trial which was referred to in the evidence the respondents were seeking to admit had been made when the Respondents knew that the Court had decided that the Petitioners were entitled to a winding up order. In these circumstances the Court would not be persuaded by the evidence that the Petitioners' decision to reject the offer was unreasonable, such that it would dismiss the petition or make an order under section 95(3)(d). The Respondents had a reasonable opportunity at the trial to argue in favour of a buy-out order as an alternative remedy but chose not press the argument, or to provide evidence of the prospects of a buy-out offer being made. The Court was not prepared to permit the Respondents to re-open their case in relation to a buy-out of the Petitioners' limited partnership interests and dismissed the Respondents' application.
As is usual in these circumstances, the Court ordered that the Respondents pay the Petitioners' costs of the proceedings. However, the Petitioners also applied for an order that the GP not be permitted to call upon the indemnity in the LPA for defending the winding up petition. Jones J noted that when considering a costs order for a contributory's petition (in the case of a company) or a limited partner's petition (in the case of an ELP), the appropriate costs order will depend upon whether the Court has directed at the interlocutory stage of the proceedings that the proceedings be treated as an inter partes proceeding between the shareholders/partners or proceedings against the company/ELP which is the subject of the petition. In these circumstances, by a prior order of the Court, the proceedings were to be treated as inter partes proceedings and the GP was made a Respondent to the proceedings in its own right. Jones J found that where such an order has been made "...the general rule is that none of the costs be paid out of the assets of the [partnership] and the unsuccessful parties should pay the costs of the successful parties..." However, the Court made no final determination on this point as the GP had not yet made any claim on the indemnity.
The Grand Court's decision offers helpful guidance concerning the Court's approach to the exercise of its just and equitable jurisdiction to wind up ELPs and as to the standard of conduct expected of general partners of Cayman Islands ELPs in fulfilling their duties under the relevant LPA and the Law. This case has re-affirmed that the well-established legal principles applicable to the winding up of companies will apply to ELPs, while also clarifying the Court's position in relation to the admission of further evidence following delivery of a draft judgment to parties' attorneys and the appropriate costs orders in winding up proceedings.
1 In re Cybernaut Growth Fund, L.P. (Unreported, Jones J, Grand Court, 12 September 2013). Maples and Calder acted for the petitioning limited partners.
2 Section 92(e) of the Companies Law (2013 Revision) as applied to ELPs by section 15(4) of the Exempted Limited Partnership Law (2013 Revision).
3 A winding up petition on just and equitable grounds will be dismissed, in the exercise of the Court's discretion, if there is an alternative remedy available to the petitioner and that he is acting unreasonably in not pursuing it. See the Court of Appeal decision in Camulos Partners Offshore Limited v Katherin & Co 2010 (1) CIHL 303.
4  1 WLR 230
5  1 WLR 1489
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