British Virgin Islands: Harneys Cayman Secures First Strike Out Of A Winding Up Petition Under Section 95(2) Of The Companies Law
Last Updated: 30 September 2015

On 16 September 2015 the Grand Court of the Cayman Islands handed down its written reasons for striking out a winding up petition under Section 95(2) of the Companies Law (2013 Revision) (the Law).  This is the first time the Grand Court has decided the fate of a petition based on the application of Section 95(2), which provides as follows:

"95 (2) The 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.".

Based on the applicability of Section 95(2), the Court, following a two day hearing, found that the Petitioners were contractually bound not to present a winding up petition, and ordered that the Petition be struck out as an abuse of the process of the Court with indemnity costs being awarded to the Respondents, represented by Harneys.

The Facts

A winding up petition (the Petition) was presented on 22 July 2015 by Reservoir Capital Master Fund II LP and three related entities (Reservoir) who are the limited partners of Rhone Holdings, LP (the Partnership), a Cayman Islands exempted limited partnership. The grounds for the Petition, presented on the just and equitable ground, included allegations of dissipation or misuse of the Partnership's assets and mismanagement by its investment manager, RCM Capital Management LLC and Ritchie Capital Management Ltd (RCM), which also controlled Rhone Capital (GP) Ltd, one of the two general partners of the Partnership (collectively the Respondents), the other controlled by Reservoir. Following an ex parte hearing, the Court appointed provisional liquidators to the Partnership. By way of response, the Respondents sought orders that the Petition be struck out as an abuse of process and that the provisional liquidators be discharged.

The Respondents' Arguments

Aside from a strenuous rebuttal of Reservoir's allegations, there were four main grounds under which the Respondents argued that the Petition should be struck out as being an abuse of process of the Court. These were essentially as follows:
 

  1. It was an abuse of process to present a petition when the Petitioners were precluded from doing so under the Partnership's Limited Partnership Agreement (LPA);
  2. There were alternative reliefs or remedies to winding up available to Reservoir in the circumstances;
  3. Reservoir lacked any tangible interest in the winding up, and thus had no standing to present a winding up petition; and
  4. The evidence submitted in support of the Petition was replete with RCM's confidential and, in some cases privileged information, which had been unlawfully provided to Reservoir.

In respect of the first ground of objection (upon which the Court ultimately decided the matter) the Respondents referred the Court to the LPA which contained a clause whereby the parties expressly agreed inter alia '... not to cause an involuntary proceeding or petition to be filed seeking winding up, liquidation, dissolution, reorganisation or other relief in respect of [the Partnership]...' (the Non-Petition Clause), which in the Respondents' submission, constituted a clear and unambiguous agreement not to petition, of the type in contemplation by Section 95(2). At the ex parte hearing to appoint the provisional liquidators, the Court's attention had not been drawn to Section 95(2).

In support of the application of Section 95(2) the Respondents argued that the relevant part of Section 36(3) of the Exempted Limited Partnership Law, 2014 (ELPL) which states that '... except to the extent that the provisions [of Part V of the Law] are not consistent with [the ELPL] the provisions of Part V of the Law and the Companies Winding up Rules shall apply to the winding up of an exempted limited partnership ..'  when read plainly, means that Section 36(3) is made subject to Part V of the Law (within which Section 95(2) is found) to the extent that the provisions of Part V are not inconsistent with the ELPL and that it follows, as the ELPL makes no reference to winding up proceedings being prohibited by agreement, that the matter at hand would be left to be dealt with by Part V of the Law.

The Respondents also referred the Court to the mandatory nature of the word "shall" in Section 95(2) and argued that the Court must dismiss a petition where the Petitioner is contractually bound not to present it.

In support of its submissions on Section 95(2), the Respondents also cited the English case of Moss v Elphick1, as cited with approval more recently by the Supreme Court of Western Australia in Nelson v Moorcraft2 as authority for the proposition that partners may contract with each other to determine their partnership only at such time as they all agree and that, therefore, a provision not to present a winding up petition in a partnership context was enforceable and not contrary to public policy.

The Petitioners' Arguments

The Petitioners argued that the Non-Petition Clause was unenforceable as being contrary to public policy and that unless the Court could be satisfied that that point was not even arguable, the matter ought to be determined at the final hearing of the Petition as opposed to summarily. In the Petitioners' submissions, Section 95(2) gave the Court a discretion to wind up even where there was a non-petition clause, due to the words 'or adjourn' in Section 95(2).  The Petitioners also argued that Section 95(2) was aimed at a situation where the parties have provided for some means of alternative dispute resolution, which was not the case here.

It was further submitted that Section 36 of the ELPL did not render the ability to present a winding up petition subject to contrary terms in the partnership agreement. In support of this submission, counsel sought to rely on the decisions in the Cayman Islands cases of TNT NV Logispring GP L.P 3 and Re Cybernaut Growth Fund L.P.4

Finally, on construction of the ELPL, the Petitioners submitted that the phrase "subject to any express or implied term of the partnership agreement to the contrary" which is found in several sections of the ELPL was not used in Section 36(3)(g)5 and that it followed, accordingly, that Section 36(3)(g) effectively "trumps" Section 95(2).

The Court's Decision

In reaching its decision, the Court found that the Respondents succeeded on the basis of the application of Section 95(2) and that the Court, therefore, did not need to go on to consider the other grounds for striking out the Petition. The Court's decision can be summarised as follows:  

  1. Contrary to the Petitioners' submissions and given the overriding objective of the Court to deal with cases justly, expeditiously and in an economical way, it would not be appropriate to await the full hearing of the petition to determine the particular issues in question, which would be more properly disposed of summarily.
  2. The Court agreed with, and quoted extensively from, the judgment of the both the English Divisional Court and Court of Appeal in Moss v Elphick in agreeing that the ability of partners to agree that a partnership should be determinable only by mutual agreement has a long history at common law, which position has survived both the Partnership Law and the ELPL. If partners can agree for a partnership only to be determinable by mutual agreement, the Court found that it follows that they can also agree not to present a winding up petition; there is nothing in Section 95(2) that is inconsistent with the ELPL and there is no express provision in the ELPL that would make Section 95(2) inapplicable. The Court found the contents of Section 95(2) to be entirely consistent with the reasoning in Moss v Elphick.
  3. The Court found there to be no public policy principle which the Non-Petition Clause offended. Quite the contrary, it would be in-keeping with public policy for partners to want to agree that one partner could not terminate without the agreement of the other, particularly where, as in the case at hand, the Respondents had expended considerable sums in entering the partnership. Regardless, public policy could not override the clear statutory provision of Section 95(2).
  4. The Respondents' submission that the case of TNT NV Logispring GP L.P was a case which was decided before Section 95(2) came into force and that, in any event, the provisions and facts were materially different from those being considered in the case at hand, was correct. Furthermore, the Court in Cybernaut had before it a very differently worded clause than the Non-Petition Clause. There was nothing to suggest that the Court in Cybernaut had had to consider Section 95(2) and as such that judgment was not on all fours with the facts in the instant case.
  5. The Court rejected the Petitioners' submission that the Court has discretion, because the Petition was presented on the just and equitable ground, to go on and hear the Petition and make the type of alternative orders set out in Section 95(3) of the Law. The Court held that it would have to have the power to make a winding up order in the first place before any of the winding up alternatives in Section 95(3) were triggered.

Accordingly the Court struck out the Petition as being an abuse of the process of the Court and awarded costs against Petitioners on the indemnity basis, such costs having been incurred unnecessarily.

Conclusion

This case demonstrates how a Court will treat a non-petition clause in a contract as well as providing useful guidance on the interplay between the ELPL and Part V of the Law.  The Court's treatment of Section 95(2) as being unambiguous in its terms and mandatory in its application serves as a useful reminder for practitioners to carefully review a client's contractual documents when considering what remedies it may have at its disposal.

David Butler and Gráinne King of Harneys' Cayman Islands litigation team represented RCM with Tom Lowe, QC.

Footnotes

1. [1909]1 K.B. 465 and [1910] 1 K.B. 846

2. [2014] WASCA 212

3. [2009] CILR 456

4. Unreported, Jones J, 23 July 2013.

5. Section 36 (3)(g), ELPL "on application by a partner, creditor or liquidator, the court may make orders and give directions for the winding up and dissolution of an exempted limited partnership as may be just and equitable"

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