We have recently experienced an increase in mandates concerning disputes between shareholders and the Board of a Cayman company, which in many cases, leads to a shareholder applying to appoint provisional liquidators over the Company on a just and equitable basis. Therefore, we considered it important to remind those considering this remedy of the evidentiary hurdles they need to overcome to exercise it successfully.
Under Cayman Islands law, a shareholder of a Cayman Islands company has an ability to apply to the Cayman Court for the appointment of joint provisional liquidators in circumstances where they can satisfy the Court that it is just and equitable to do so. The appointment of joint provisional liquidators is usually sought by shareholders to prevent dissipation of assets or mismanagement of the company since upon their appointment, the directors' powers cease and the provisional liquidators assume control of the company to investigate the concerns of the appointing stakeholders.
In the case of Al Najah Education Limited – FSD 119 OF 2021(RPJ), Al Najah Education Limited was a Cayman Islands company which held investments in schools and nurseries in the Middle East with part of its management functions situated in Dubai. However, on 11 May 2021, shareholders with a 7.87% stake in the company sought the appointment of provisional liquidators. The shareholders claimed that the management of the company had demonstrated a pattern of improperly and fraudulently protecting and enriching the company's management at the expense of its shareholders which required immediate investigation by independent liquidators. In support of its application, the applicants relied on findings of the Dubai Financial Services Authority ("DFSA") and the DFSA's Financial Markets Tribunal to supports its case for the appointment of provisional liquidators. However, the Court refused the application for the appointment of provisional liquidators on the basis that evidence relied upon by the applicants and the historic findings of the DFSA did not demonstrate a current risk of dissipation and mismanagement.
Therefore, this case serves as a timely reminder that the evidence used to support an application for the appointment of provisional liquidators must demonstrate that the grounds upon which the application is made are current. Historic concerns on dissipation and mismanagement which are now irrelevant will unlikely persuade the Court to appoint provisional liquidators.
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