A recent decision of the Grand Court of the Cayman Islands has cast some doubt over what has been a long-standing, last-chance remedy for prejudiced, disenfranchised or otherwise aggrieved stakeholders of Cayman entities: the just and equitable winding up petition.
In Rhone Holdings, L.P., Justice Mangatal dismissed such a winding up petition and ordered the petitioner to pay costs on the grounds that it constituted an abuse of process for the petitioner to present a petition, since it had been prohibited from doing so under an agreement to which it and the respondent, Rhone Holdings, L.P. (a Cayman Islands ELP) ("Rhone") were parties; the limited partnership agreement governing Rhone (the "LPA"). The judgment was handed down on 18 August 2015, and written reasons were delivered on 16 September 2015.
The LPA provided that the "approval of all the Parties" was required in order to terminate the partnership. Unable to obtain the approval of one of the general partners (the "Dissenting GP"), the remaining parties (together, the "Petitioners") petitioned the Court on an ex parte basis seeking (among other orders) an order that Rhone be placed into provisional liquidation the ("Petition"); the Court granted the relief sought on 23 July 2015.
Upon discovering the Petition, the Dissenting GP made an application seeking that the Petition be struck out (the "Strike-Out Application"), citing four main grounds:
- It was an abuse of process to present the Petition where the Petitioners were precluded from doing so under the LPA.
- The availability of alternative relief or remedies.
- The lack of tangible interests of the Petitioners in a winding up.
- Misuse of confidential information.
The Strike-Out Application was heard over 12 and 13 August 2015 and Justice Mangatal, having been informed in advance of circumstances that necessitated a swift judgment, delivered a short judgment on 18 August 2015 in which she indicated that the first ground had persuaded her that the Petition should be struck out. Accordingly, when subsequently delivering written reasons the Honourable Judge indicated that it would serve no useful purpose to deliberate upon the remaining three grounds, as any such comments would merely serve as obiter.
Section 95(2) of the Companies Law
Justice Mangatal was persuaded by the Dissenting GP's submissions that section 95(2) of the Companies Law (2013 Revision) ("Companies Law"), which provides that:
"[t]he Court shall dismiss a winding up petition or adjourn the hearing of a winding up petition on the ground that the petitioner is contractually bound not to present a petition against the company."
is both (a) drafted in mandatory terms; and (b) incorporated by reference into the relevant parts of the Exempted Limited Partnerships Law (2014 Revision) ("ELP Law"). It therefore followed that if parties, who had been free to agree the terms upon which they contracted, entered into an agreement which expressly forbid the presentation of a winding up petition, then there had been a clear agreement not to issue winding up proceedings and as such, if a petition was presented in contravention of such an agreement, the Court was required to dismiss it under section 95(2).
Under section 92(e) of the Companies Law, a company may be wound up by the Court if "the Court is of the opinion that it is just and equitable that the company should be wound up". The circumstances in which it will be just and equitable to wind up a solvent company are not defined in statute but can be said to fall within the following categories: lack of probity on the part of the directors; the need for an independent investigation of the company's affairs; deadlock; the oppression of minority shareholder; and loss of substratum. The "just and equitable petition" has therefore long been seen as a means of last resort for a creditor or shareholder who may otherwise be deprived of relief and it has been seen as an important matter of public policy that this avenue remains available.
Justice Mangatal did discuss the Public Policy argument in her judgment; taking the view that it is a more important matter of public policy that parties who have freely negotiated and entered into agreements be held to their terms.
The judgment has been questioned amongst local practitioners because the construction applied by Justice Mangatal seems to hold little regard for the purposes of just and equitable relief: it is there to be used if all else fails or to protect innocent victims of fraud or wrongdoing by counterparties, in whose reasonable contemplation such wrongdoing could not have been when the documents containing the (now prohibitive) terms were agreed.
Whilst the decision has not been appealed, we expect to see the judgment and facts of the specific case examined in more detail in future cases.
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