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.  (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
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.  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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