A recent decision by the Cayman Islands Grand Court (In Re Freerider Ltd, judgment dated 13 May 2010) has provided useful guidance on "loss of substratum", one of the bases which justifies a winding-up on the just and equitable ground. Traditionally, this test was said to have been met where the company's purpose was incapable of achievement. The Court in Freerider held that a company incorporated in Cayman for tax reasons, which ultimately failed to achieve intended tax benefits, had lost its substratum and so should be wound up.

Freerider Ltd ("Freerider") was incorporated as part of a corporate structure set up to develop and exploit a device known as TheWheel, a self-propelling electric wheel which offers significant energy savings. The intention was that Freerider would hold the IP rights to TheWheel while its development and marketing would be carried out under licence by a Dutch company, which would pass profits back to Freerider by way of royalties.

After the structure had been set up, the Dutch tax authorities ruled that Freerider was resident in the Netherlands and therefore tax was payable on payments to it.

Meanwhile the relationship between the two majority shareholders broke down, and one of them (the inventor), represented by Appleby, petitioned to wind up Freerider on the just and equitable ground. The other majority shareholder opposed the petition.

The Judge (Mr Justice Foster) held that winding-up was justified on a number of grounds, including loss of substratum.

The Judge considered the test for loss of substratum proposed by Jones J in In re Belmont Asset Based Lending Ltd1, namely that if the circumstances are such that it is impractical, if not actually impossible, for the company to carry on its business in accordance with the reasonable expectations of its participating shareholders, it will be just and equitable to wind up the company. He also referred to the older cases, which indicate that a company has lost its substratum if the underlying purpose for which it was incorporated is incapable of achievement. He held that both tests had been met in this case.

This case demonstrates that the Cayman court is willing to take a commercial view in relation to substratum arguments in appropriate cases, in order to assist investors in Cayman companies. Similar developments have also been seen in the BVI courts2, where the substratum doctrine has been developed to accommodate modern circumstances.


1. Unreported judgment dated 19 January 2009.

2. For example, Citco Global Custody NV v Y2K Finance Inc (judgment dated 25 November 2009), approved in Western Union International Limited v Reserve International Liquidity Fund Ltd (judgment dated 26 January 2010)

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