The Court of Appeal of the Cayman Islands has confirmed that once it has been established that a solvent liquidation will be more "effective", "economic" or "expeditious" if brought under the supervision of the Court pursuant to Section 131(b) of the Companies Law (2018 Revision), the views of participating shareholders as to the identity of the liquidators should be respected; and that a fund manager should take a measured and neutral approach to any such application by a shareholder to assist the Court to determine whether the grounds for the application have been made out as well as the identity of the liquidators. It is not appropriate (without justification) for a fund manager to seek to oppose a petition and/or to frustrate a participating shareholder's attempts to appoint its preferred choice of liquidators.
On 8 November 2019, the Court of Appeal of the Cayman Islands handed its judgment down in Re Asia Private Credit Fund Limited (in voluntary liquidation) (Civil Appeal No. 17 of 2019 and Civil Appeal No. 27 of 2019 (Consolidated) (Cause No. FSD 232 of 2018) and Re Adamas Asia Strategic Opportunity Fund (in voluntary liquidation) (Civil Appeal No. 26 of 2019) (Cause No. FSD 72 of 2019): two related appeals concerning the meaning and effect of Section 131(b) of the Companies Law (2018 Revision), setting out the requirements of which the Court must be satisfied before ordering that a voluntary solvent liquidation be continued under the supervision of the Court.
Led by Barnaby Gowrie (Partner) and Chris Keefe (Senior Counsel) and assisted by Luke Petith and Siobhan Sheridan, Walkers (Dubai and Cayman) acting for the Petitioner (being the sole participating shareholder of each Fund) were wholly successful in crossappealing an order of the Grand Court that representatives from both FTI (being the Petitioner's nominees) and the incumbent joint voluntary liquidators (being the relevant Fund Manager's nominees) be appointed as official liquidators of a Fund; and opposing appeals in both cases brought by the Fund Managers against the Orders of the Grand Court bringing the voluntary liquidations of the Funds under the supervision of the Court.
In both cases, the Petitioner (being the sole participating shareholder of each Fund) had requested that the Fund Manager exercise shareholder voting rights (exercisable only in respect of the Founder or Manager Shares held by the Fund Manager) to appoint representatives of FTI as voluntary liquidators of the Funds. Notwithstanding such request, the Fund Managers unilaterally elected to appoint their own choice of joint voluntary liquidators.
The Petitioner commenced proceedings under Section 131(b) of the Companies Law (2018 Revision) citing concerns regarding, amongst other things, the operation of the Funds (including, the decrease in value of its investments and the possible duplication of fees within the fund structure) as well as the involvement of a former employee of the Petitioner in the Petitioner's investments into the Funds (who had been convicted of misappropriation and embezzlement of state funds during his employment by the Petitioner).
In the first case subject to appeal, McMillan J at first instance ordered that the voluntary liquidation be brought under the supervision of the Court and directed that the FTI liquidators be appointed in addition to the incumbent joint voluntary liquidators; and in the second case subject to appeal, Kawaley J also ordered that the liquidation be brought under the supervision of the Court, but ordered that the FTI liquidators (being those nominated by the Petitioner) should be appointed in place of, rather than in addition to, the incumbent joint voluntary liquidators.
The Fund Managers appealed both judgments – in respect of the supervision order made by McMillan J, principally on the basis that the Judge failed to establish that the jurisdictional requirements of Section 131(b) had been made out and failed to give sufficient reasons for his decision; and in respect of the supervision order made by Kawaley J, on the basis that the Judge was wrong to conclude that Section 131(b) could be used to replace incumbent voluntary liquidators with the Petitioner's proposed nominees. The Petitioner cross-appealed the supervision order made by McMillan J on the basis that irrelevant considerations were taken into account when jointly appointing the incumbent voluntary liquidators as official liquidators and that the decision was outside the margin of appreciation in the exercise of the Judge's discretion.
The Court of Appeal dismissed both appeals brought by the Fund Managers and upheld the cross-appeal brought by the Petitioner. In the first appeal, the Court of Appeal set aside the supervision order made by McMillan J on the basis that the Judge had failed to identify the jurisdictional basis on which the order was made; however, notwithstanding this, the Court of Appeal nevertheless found that it was open to it to make its own findings on the evidence and ordered that the voluntary liquidation be brought under the supervision of the Court and that the Petitioner's nominees (representatives of FTI) be appointed as official liquidators. The Court of Appeal commented that, if it appointed the incumbent joint voluntary liquidators of the Fund, such appointment would undermine the effectiveness of the supervised liquidation by an appearance of partiality attaching to the joint voluntary liquidators resulting from their original appointment by Fund Manager (whose role and conduct of the affairs of Fund Company would be the subject of investigation). In the second appeal, the Court of Appeal upheld the supervision order made by Kawaley J (under which FTI had been appointed as liquidator).
In summary, the Court of Appeal found that Kawaley J adopted the correct approach in his "wide-ranging and impressive judgment", in which he found that whilst the articles of association gave the power to commence a voluntary liquidation to the holder of management or founder shares, the participating shareholders were the primary economic stakeholder in relation to a voluntary liquidation; and that the starting assumption in determining the choice of voluntary liquidator should be to give weight to the views of the majority of economic stakeholders. The Court of Appeal agreed that it was appropriate to reject the Fund Manager's submissions that, in such circumstances, participating shareholders have no right to influence the choice of voluntary liquidator (or decide the appropriate winding up process).
Whilst there may be particular circumstances which might justify a departure from the general rule, the Court of Appeal has made clear that, where the sole participating shareholder nominates a fit and proper person as voluntary liquidator, the holder of voting shares should not, absent exceptional circumstances, take steps to oppose or frustrate the appointment of such nominee(s).
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