Cayman Islands: Wound Up, Or Not? Rhône Holdings In The Cayman Courts

Last Updated: 12 September 2016
Article by Ben Hobden

Insolvency petitions form part of the regular diet of commercial proceedings seen by the Cayman Island courts. Having been revised as recently as 2013, Cayman Islands company law on the standing of those able to bring winding up proceedings was recently tested at both trial and appeal.

The first instance decision of Justice Mangatal, to strike out a winding up petition presented by certain limited partners of Rhône Holdings LP, a Cayman Islands' exempted limited partnership (ELP) governed by the Exempted Limited Partnership Law 2014 (ELP Law), was the first time the Grand Court had enforced Section 95(2) of the Cayman Islands Companies Law (2013 Revision).

The Companies Law provides for the dismissal or adjournment of the hearing of a winding up petition "on the ground that the petitioner is contractually bound not to present a petition against the company". In December 2015, the Cayman Islands Court of Appeal unanimously held that the petition was contrary to an express provision requiring them not to do so, found in the limited partnership agreement, and refused to grant the petitioners leave to appeal out of time on the basis that the appeal had no reasonable prospect of success.

Enforceable clauses

To the extent that there was any debate, the decision has now made it clear that clauses within a limited partnership agreement providing that a limited partner shall not petition to wind up a partnership are enforceable and will be upheld by a court.

This matter found itself before the Court of Appeal by way of an application seeking leave to appeal out of time against the first instance decision of Mangatal J to dismiss a winding up petition presented against Rhône Holdings. In that case, clause 5.12 of the limited partnership agreement provided that the limited partners were contractually bound not to present such a petition and that, as a consequence, section 95(2) of the Companies Law, it was argued, the petition should be dismissed.

As the appeal was brought out of time, the appellants had to convince the court that the appeal would stand a reasonable prospect of success. The appellants submitted that the appeal did indeed stand a reasonable prospect of success on the grounds that section 35(g) of the ELP Law was inconsistent with section 95(2) of the Companies Law. Consequently, section 95(2) of the Companies Law should not be applied in respect of a partnership; and even if the statutory provisions were not considered to be inconsistent, then section 95(2) of the Companies Law should in any event be ignored on the grounds that an agreement not to present a petition against an ELP would be contrary to public policy.

The arguments put forward by the appellants were given short shrift, with the judgment of Sir Bernard Rix, JA describing them as "simply impossible".

Inconsistency in the statutory provisions

The ELP Law itself does not afford any power to wind up a partnership on the basis that it is just and equitable to do so. However, section 36(3) of the ELP Law expressly incorporates Part V of the Companies Law, which is entitled to do so, under 'Winding up of Companies and Associations' and includes section 95(2) which states that the court will dismiss a winding up petition on the ground that a petitioner is contractually bound not to present a petition against a company.

The appellants submitted that these provisions were contrary to section 36(3)(g) of the ELP Law, which provides that on application by a partner, the court may wind up a partnership on the basis that it is just and equitable to do so. It was said by the appellants that absent an express provision along the lines of section 95(2) of the Companies Law, the court could not dismiss a petition presented in this way.

The Court of Appeal disagreed, noting that the actual power to wind up on just and equitable grounds was not actually found in the ELP Law, but in the underlying provisions of Part V of the Companies Law; a point ultimately conceded by the appellants. The Court of Appeal held that if the legislature had not intended section 95(2) of the Companies Law to apply to the ELP then they would have expressly excluded it.

Is an agreement not to petition contrary to public policy?

By way of alternative, the appellants submitted that even if there was no inconsistency as between the ELP Law and Companies Law, section 95(2) of the Companies Law should be ignored on the basis that an agreement not to petition against an ELP would be contrary to public policy.

This submission was not accepted by the Court of Appeal which noted that a petition brought contrary to an agreement not to do so actually represented the public policy of legislators in the Cayman Islands. Indeed, that was the exact reason why section 95(2) had been enacted.

Consequences of Rhône Holdings

It is now irrefutable that the judiciary in the Cayman Islands will uphold an express contractual agreement between limited partners not to wind up a limited partnership. However, there remains a question as to what the Grand Court would do with an agreement that was not so clear in its terms.

Clause 5.12 of the agreement in Rhône Holdings was clear in its terms, providing that: "The parties agree not to cause:

  1. An involuntary proceeding to be commenced or an involuntary petition to be filed seeking:

    1. winding up, liquidation, dissolution, reorganization, or other relief in respect of the Partnership or Rhône II under any bankruptcy, insolvency, receivership or similar law of any jurisdiction now or hereafter in effect or
    2. the appointment of a receiver, trustee, custodian, sequestrator, liquidator, administrator, conservator, or similar official for the Partnership or Rhône II, or
  2. The Partnership or Rhône II to

    1. voluntarily commence any proceeding or file any petition seeking winding up, liquidation, dissolution, reorganization or other relief under any bankruptcy, insolvency, receivership or similar law of any jurisdiction now or hereafter in effect,
    2. consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding, application or petition described in clause (a) above,
    3. apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, liquidator, administrator, conservator or similar official for the Partnership or Rhône II or for a substantial part of any of its assets,
    4. file an answer admitting the material allegations of a petition filed against it in any such proceeding,
    5. make a general assignment for the benefit of creditors or (6) take any action for the purpose of effecting any of the foregoing."

Clause 5.12 of Rhône Holdings' limited partnership agreement was nothing if not comprehensive. It is abundantly clear in its terms in that it prevents the limited partners from taking steps to wind up the partnership. The Court of Appeal has now confirmed that this is entirely permissible and this is clearly a correct representation of the law, and the correct policy; one of the attractions of the jurisdiction is that sophisticated investors should be permitted to contractually define their relationship.

However, Rhône Holdings does beg the question as to what a court would do when faced with a limited partnership agreement, that is not as expansive as the clause set out above.

It is commonplace for a limited partnership agreement to have provisions providing for the termination of a partnership (such as the effluxion of time). It is not so common to see a provision in the terms of clause 5.12.

What then, if there is no clause along the lines of clause 5.12 prohibiting the partners from petitioning, but no express provision providing that a partnership can be terminated following a winding up order made by the court? Have the limited partners impliedly contracted out of their ability to petition to wind up the partnership of the just and equitable basis?

The weight of opinion suggests, should limited partners wish to exclude their ability to petition to wind up a partnership on the just and equitable ground, then they must do so expressly.

This must follow given the number of cases on which a petition has been presented on the just and equitable basis and has not been struck out even though a just and equitable winding up is not listed as one of the occasions on which the partnership will be terminated. The statutory ability to wind up will in all likelihood trump a silent partnership agreement.

And what about the limited liability company?

Late last year, the Cayman Islands legislature passed a bill to allow a new type of vehicle to be legally incorporated; the limited liability company (LLC). The Limited Liability Companies Law 2016 has now been enacted and was brought into force on 8 July, 2016.

As is envisaged by the law, an LLC will, in essence, be a hybrid of an exempted limited company and an ELP . It is important to note here that members of an LLC are generally free to govern their relationship with each other however they should wish, as long as it is documented in the LLC agreement.

It is interesting to note that the legislature has dealt with the winding up of an LLC in the exact same way that it dealt with the winding up of a partnership. Section 37 of the Bill expressly incorporates the provisions of Part V of the Companies Law. It also contains a provision (section 37(1)(f ) in near identical terms to section 36(3)(g) of the ELP Law), which will permit the court to order the winding up of an LLC on the basis that it is just and equitable to do so.

It would, therefore, appear clear that, should the facts in Rhône Holdings be replicated for an LLC, the court would take the exact same approach and uphold the contractual bargain made between the members of the LLC, and prevent any member from acting contrary to that agreement by striking out any petition presented with reference to section 95(2) of the Companies Law. Given the flexibility of the LLC structure and the ability of members to contract as between themselves, this is clearly the correct approach.

This article was first published in CDR, Volume 7, Issue 4, July-August 2016.

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.

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