In an already widely-discussed decision of the Cayman Islands
Grand Court, Mangatal J parted company this week with one of her
fellow judges by declining to follow Jones J’s first instance
judgment in the recent Cayman Islands case of Re China Milk
Products Group Ltd. [2011] (China
Milk) and striking out a winding up petition filed by
the directors of China Shanshui Cement Group Limited, a Cayman
Islands company listed on the Hong Kong Stock Exchange (the
Company), for lack of
standing.
The judge felt unable to endorse the Court’s strained
construction of section 94 of the Companies Law (the
Law) in China Milk, which for the last
four years has relieved directors of insolvent Cayman Islands
companies of the obligation to seek a resolution of the
company’s shareholders in general meeting before filing a
winding up petition (and, by extension, applications for
appointment of provisional liquidators) in the Cayman courts.
The application to strike out the petition was made by a
shareholder in the Company, China Shanshui Investment Company
Limited – represented by Harneys – and supported
by another shareholder, Tianrui (International) Holding Company
Limited, against a background of allegations of bad faith in
circumstances where the filing of the petition itself was said to
be responsible for accelerating liabilities to bondholders of the
otherwise solvent Company. Notwithstanding an offer by the
Company’s largest shareholder to pay all current liabilities
to creditors in full, the petitioning directors, who had come under
heavy criticism from the Hong Kong court for their conduct in
relation to on-going litigation with the shareholders, argued that
provisional liquidators should be appointed urgently and given
far-reaching powers designed to prevent the majority shareholders
from taking steps to reconstitute the board in a general
meeting.
The decision re-establishes the principles set out in the English
case of Re Emmadart Ltd. [1979] as good law in the Cayman
Islands. The effect of the judgment, in combination with the
wording of section 94 of the Law, is that only companies (a)
incorporated after 1 March 2009 and (b) with appropriately worded
articles of association are excused from seeking a resolution of
their shareholders before petitioning for their own winding
up.
It should be stressed that new companies are largely unaffected by
the decision, since they are expressly permitted by the Law to deal
with the issue in the drafting of their articles. That said,
the resulting status quo is likely to cause some difficulties for
directors of existing, insolvent companies who feel that the
interests of the company’s creditors are best served by
appointing provisional liquidators to propose a restructuring
plan. In such cases, shareholders with arguably no legitimate
interest in the future of a company will still have a say in
whether a restructuring is permitted to take place. At a time
when many companies are looking to explore restructuring
opportunities in order to preserve value, it is to be hoped that
the Legislature can take this opportunity to introduce new
provisions into the Law to provide assistance to directors in their
duty to have proper regard for the interests of creditors and
act without resolutions from the members.
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