Where a shareholder has redeemed his shareholding following a failed investment without objection some months prior to the initiation of a voluntary liquidation, the Court will not permit him to use the statutory deferral provisions relating to voluntary liquidations for an abusive or improper purpose. This includes using such proceedings as leverage to exert undue pressure in proposed claims against the company or directors. Additionally, the prior redemption of a shareholding, means that a former shareholder does not have standing as an investor to petition for a court-supervised liquidation. On the facts in this case (which may apply in similar cases), any creditor's standing to do so, would at best be contingent and prospective in circumstances where they have not established a claim by way of judgment or otherwise.
In the recent judgment involving Skye Assets Fund SPC (in voluntary liquidation) (the “Company1”), the Grand Court of the Cayman Islands considered an application brought by an interested party, Mr. Kim, (the “Petitioner”) for the deferral of the liquidation of the Company pending the determination of a petition for a court-supervised liquidation. The Court considered (i) the relief sought by the Petitioner and (ii) the possible abuse of court process.
As a summary of the background facts, an order was initially granted by the same Court on 26 April 2021 to defer the liquidation of the Company until 20 May 2021. Mr. Hong was the voluntary liquidator of the Company as well as the then sole shareholder and director of the Company.
In granting the initial short deferral order, the Court considered the Petitioner's case, which among other allegations, alleged that Mr. Hong solicited his investment into one of the Company's funds through false representations, leading him to enter into a subscription agreement for US$400,000 in exchange for 400 class A shares. Following a failed investment, the Petitioner ultimately redeemed his shares realising a loss of around 43%.
As part of his submissions in support of the deferral and court-supervised liquidation applications, the Petitioner articulated a claim against the Company for actionable misrepresentation (either fraudulent, negligent or actionable) under the Contracts Act 1996, for an amount of US$312,022.40 sounding in damages; as well as potential claims against Mr. Hong personally. The Petitioner stated that he had no option but to bring the deferral application with the aim of bringing the Company under court-supervised liquidation as his requests to Mr. Hong to pause the liquidation went unanswered.
In Mr. Hong's submissions (on behalf of the Company), he stated that (i) the deferral was brought at the last minute, with no opportunity afforded for consideration of the deferral application; (ii) as the Company had no assets, the cost of the deferral application and possibly that of the supervised liquidation will be borne by him, to his prejudice; (iii) the diminution in the share value was the result of a failed investment strategy, therefore making the underlying damages claims speculative; and (iv) the Petitioner was fully redeemed, and so had no standing to claim in the liquidation of the Company. Further, the costs of the proposed action – deferral, trial of supervised petition, official liquidator investigations, misrepresentation claims etc. – would be disproportionate to the losses claimed.
Mr. Hong explained that, after consulting the investors, a decision was taken to place the Company into voluntary liquidation as the size of the investment became too small and it no longer made economic sense to maintain it. The remaining investor shareholders were compulsorily redeemed and other voluntary liquidation formalities complied with.
In reaching its decision on the matter, the Court considered section 151 of the Companies Act 2021 (as amended) (the “Act”). The Act provides that once a liquidator's return is filed in an insolvency, an interested party may bring an application to defer the date of the dissolution only within the three months from the date of the filing, prior to a company being deemed as dissolved. The Court referred to what it described as the only other decided Cayman case on the relatable and analogous subject of the deferral of dissolution; Re Exten Investment Fund and Others  (1) CILR. In this case, an order of deferral and court-supervised liquidation was granted because (i) not all aspects of the company's business had been concluded; (ii) no detriment would flow to any of the parties involved; and (iii) it was a matter of public interest.
In the present case, none of the relevant features of Re Exten Investment Fund were present. The Court noted that the Petitioner had redeemed his shares two months prior to the liquidation of the Company, having being aware of the losses sustained by the Company. This meant that he had no standing as a creditor nor as an investor shareholder as he had no remaining proprietary interest in the Company. The application appeared to also be geared towards applying pressure on Mr. Hong personally, as he would have been compelled to personally settle the Petitioner's claim in avoidance of a more expensive and protracted liquidation or litigation process.
In reviewing the facts, it became apparent to the Court that the Petitioner's deferral application and ultimately the supervision order (i) lacked substance; (ii) was an abuse of court process; and (iii) did not “fall within the general legislative purpose” of section 151 of the Act and “may fairly be described as ‘shadowy'”. The order for the deferral of the dissolution was discharged and the dissolution of the Company allowed to continue.
In contrasting the present case against the observations of the Court in Re Exten Investment Fund, it can be seen that in granting deferral applications in liquidation proceedings, Cayman courts carefully balance the merits of the applicant's case as against those of the liquidator. For while shareholder concerns cannot be erased by liquidating a company, the Court will not allow interested parties to use a deferral application for shadowy personal claims.
1 Skye Assets Fund SPC (in voluntary liquidation), FSD 93 of 2021 (ASCJ), unreported, 30 June 2021.
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