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)
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Virtual currency trading value and volume is soaring globally, but regulating virtual currencies and those who provide virtual currency exchange services (Exchangers) is challenging.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).