Cayman Islands: Voluntary Liquidation: The Right Way To Investigate An Alleged Wrong

In a decision that will reassure investors in Cayman Islands investment funds and other vehicles, the Grand Court has shown its willingness to facilitate the investigation of legitimate concerns raised during a voluntary liquidation.1

The decision is the first written ruling on the Court's power to defer the dissolution of a Cayman Islands company in voluntary liquidation under section 151(3) of the Companies Law and also considers the Court's power to bring a voluntary liquidation under the Court's supervision in the context of an investigation into possible wrongdoing.

Cayman Islands Voluntary Liquidations

Cayman Islands funds frequently have their existence brought to an end through voluntary liquidation. Where the vehicle is solvent, a voluntary liquidator, who may be either an affiliated party or an independent professional, is appointed to wind up its affairs, ensure all creditors are paid and the remaining surplus is distributed to investors. Where the vehicle's affairs are in order before entering voluntary liquidation, the process is generally straightforward and does not require any court involvement. In the context of corporate funds, it is common for participating shares to be redeemed and final distributions to investors made before the company is placed into voluntary liquidation. Nevertheless, a stakeholder or the voluntary liquidator may seek the Court's assistance in certain circumstances, including by applying to have the liquidation continue under the Court's supervision where that would facilitate a more effective, economic or expeditious liquidation.2

Facts

The case concerned the voluntary liquidation of two investment funds (the "Funds") and their investment managers (the "Managers"), each of which was a Cayman Islands company. For many months prior to the commencement of the liquidations, the sole investor in the Funds had been seeking information concerning the Funds from the Managers. The investor's shares were compulsorily redeemed and the Funds and the Managers were then placed into voluntary liquidation and progressed through liquidation within a very short time. The voluntary liquidator filed his final returns with the Registrar of Companies, three months after which the companies would be deemed to be dissolved, meaning they would cease to exist and could not later be brought back into existence (which in turn would make investigating their affairs and pursuing any claims that might exist difficult or impossible). During that three month period, the investor learned of the liquidations and wished to prevent the companies being dissolved before there had been a full and independent investigation into certain payments allegedly made by the Managers. The investor applied to the Court for orders deferring the dissolution dates of all four companies and bringing the liquidations of the Funds under the Court's supervision, appointing qualified insolvency practitioners (specifically, partners of Deloitte & Touche) as its official liquidators.3

Deferral of the Scheduled Dissolution Dates

As a threshold question, the Court had to consider whether the investor had standing to bring the deferral applications, notwithstanding the compulsory redemption of its shares in the Funds and the payment of the redemption proceeds to the investor based on the net asset value of the shares as determined by the Managers. This required the Court to determine whether the investor was a "person who appears to the Court to be interested" within the meaning of section 151(3) of the Companies Law. In the absence of Cayman Islands authority, the Court referred to English decisions which had given that phrase a broad interpretation.4 As any recoveries in respect of the alleged payments made by the Managers would ultimately flow to the investor as the sole economic stakeholder in the Funds, the Court found that the investor had a sufficient interest in the deferrals to be regarded as an interested person.

The Court then went on to consider whether to grant the deferrals, referring to two Hong Kong decisions based on similar legislation.5 The factors that persuaded the Court that deferring the dissolutions was appropriate included that: (i) there were aspects of the Funds' businesses that had not yet been fully wound up; (ii) the deferrals would enable the investigation and possible pursuit of claims in respect of the alleged payments; and (iii) it was in the public interest that any past wrongdoing be investigated and, if appropriate, action taken.

Court Supervision of Voluntary Liquidations of the Funds

The investor argued that court supervision would result in more effective liquidations because official liquidators appointed by the Court would be able to utilise the compulsory powers in the Companies Law to obtain documents and property belonging to the Funds, they would be able to obtain recognition in other jurisdictions if necessary to pursue the investigation and the proposed appointees were wholly independent and had the necessary skills and experience to conduct a forensic investigation of the sort that was required.

The voluntary liquidator opposed the supervision applications on the grounds that the investor was neither a shareholder nor a creditor of the Funds, which are the only classes of persons (together with the voluntary liquidator) who can bring such an application under the Companies Law. The voluntary liquidator argued that the investor could not be regarded as a creditor of the Funds because any potential recoveries in respect of the alleged payments were simply too uncertain on the evidence before the Court.

The Court disagreed, finding that the investor had provided sufficient evidence to establish that it was a contingent creditor of the Funds and the Court considered that a contingent creditor does have standing to make an application for court supervision of a voluntary liquidation.

Conclusion

Voluntary liquidation can be a swift and efficient process to wind down Cayman Islands vehicles that are no longer carrying on business. However, where legitimate concerns are raised by stakeholders during the liquidation as to matters that require investigation, voluntary liquidation cannot be relied upon as a way to shut out those concerns. The Court has the appropriate tools and in the right circumstances will assist stakeholders in ensuring that such an investigation takes place.

Footnotes

1. See In re Exten Investment Fund (Unreported, Grand Court, 23 June 2017). Maples and Calder acted for the successful petitioning investor.

2. Section 131(b) of the Companies Law. Amongst other things, court supervision results in independent professional insolvency practitioners being appointed to conduct the liquidation.

3. The investor accepted that it did not have standing to apply for court supervision in respect of the Managers and that any such application would fall to be made by the official liquidators of the Funds once appointed.

4. Re Test Holdings (Clifton) Ltd: Re General Issue and Investment Co Ltd [1969] 3 All ER 517; Re Wood and Martin (Bricklaying Contractors) Ltd [1971] 1 All ER 732.

5. The Commission of Inland Revenue v Fullbright Co. Ltd HCCW 208/2008; Kelso Enterprises Limited v Liu Yiu Keung CACV 303/2006.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
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”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions