Created Date:
08 April 2024

Take Another Look: Investigation as a Standalone Basis for a Just and Equitable Winding up in the Cayman Islands

In the April edition of The Hong Kong Lawyer, litigation partner Tim Haynes and counsel Xia Li discuss how offshore jurisdictions are at forefront of creating new law and pushing boundaries when it comes to shareholder remedies, including in the just and equitable winding up of companies.

The recent Privy Council decision in FamilyMart China Holding Co. Ltd v. Ting Chuan Holding Corporation [2023] UKPC 33 addressed the interplay between the enforceability of an agreement to arbitrate and the just and equitable winding up jurisdiction in the Cayman Islands, calling for an even closer collaboration between onshore and Cayman lawyers when that issue arises. This article explores another aspect of the just and equitable winding up regime where there is a significant and important difference in the range of potential approaches that might be taken offshore and onshore, examining the question of when a right to investigate fraud or wrongdoing by those in charge of the company might form a standalone basis for the winding up of a company.

The Unfolding Story: A Century of Cases

The Cayman Courts at least at first instance have developed an approach rooted in case law that stretches back over a century and potentially offers those with the right evidence an alternative basis to a petition. In the Matter of GFN Corporation Limited [2009] CILR 135, the then Chief Justice of the Cayman Islands, The Honourable Smellie C.J., considered the relevant authorities and determined that there was a right to wind up, distinct from the wider right to wind up a company on a just and equitable basis, where there is a compelling need for the affairs of the company to be investigated. He said this: “The need for an investigation into the affairs of a company could be a basis for the making of a winding up order on the just and equitable ground. The need for a thorough investigation of the relationship between the petitioner and the respondent had been established through the evidence of the fraudulent manipulations of the account, which suggested that the petitioner had been used as a channel for the criminal extraction of depositors’ funds.

In winding up the company, the learned judge held at [37] that: “In the wider context of the allegations in this petition, the authorities have also clearly established that the court has jurisdiction, in the exercise of its statutory discretion……, to wind up a company on the basis that an investigation into its affairs is necessary and justified. In the present circumstances, the court can use its discretion, more especially because an investigation into GFN’s affairs relating to the petitioner is justified.”

In coming to that conclusion, the Chief Justice cited authority dating back to the 19th century, including In re Krasnopolsky Restaurant & Winter Garden Co. (9) [1892] 3 Ch at 178, where Vaughan Williams, J had expressed the view that: If the circumstances are such as to suggest that an investigation into the circumstances of the company, under the Companies (Winding-Up) Act, 1890, will be likely to turn out to the advantage of the unsecured creditors, that alone is sufficient ground for making a compulsory order. Over a century later, in the highly publicised dispute concerning the Parmalat fraud, the Chief justice cited the Cayman case of In re Parmalat Capital Fin. Ltd (12) (2006 CILR 171), in which the Grand Court had held at [18] that “The circumstances surrounding its downfall need continuing investigation, and that is a free standing ground for making a winding up order: Re Gordon & Breach Science Publishers [1995] 2 BCLC 189; In re Pantmaenog Timber Co Ltd [2004] 1 AC 158 (HL), Bell Group Fin. (Pty) Ltd v Bell Group (UK) Holdings Ltd. [1996] BCC 505”.

GFN went on appeal with the Court of Appeal leaving the question open, stating at [32] that It is unnecessary also to decide whether the Chief Justice was wrong to hold that a creditor could obtain a winding up order on the just and equitable ground on the sole basis that an investigation into the company’s affairs was necessary. We heard no argument on that question. It can await further consideration by this court when the need arises.” 

Where there was fraud or other evidence of serious wrongdoing, GFN continued to be a feature in submissions made to the Cayman Courts. For example, in In the Matter of Principal Investing Fund Limited (FSD 268, 269 and 270 of 2021 (DDJ), the Court, in considering GFN, held at [36] that “Moreover, Smellie CJ in In re GFN Corporation Limited 2009 CILR 135 (at paragraph 42) helpfully confirmed that the need for an investigation into the affairs of a company can be a free-standing basis for making a winding up order on the just and equitable ground. The Chief Justice also stated (at paragraph 43 of his judgment) that the liquidators should have the power to investigate as widely in the circumstances as may be required, including an investigation into the reasons for the company’s failure and the conduct of those concerned in its management.

Gathering Momentum: The Analysis in Seahawk

The case of In the Matter of Seahawk Ching Dynamic Fund FSD 0023 of 2022 (DDJ) has recently brought the issue of the right to investigate as a standalone right for the winding up of a company in the Cayman Islands to the forefront of discussion.

In addition to Parmalat and other cases mentioned above, Doyle J, looked further into the Cayman and English case law, including Henderson J’s decision in Paradigm Holdings 2004-5 CILR 542, where the Cayman Court held at [35] that: These are matters which require a full investigation. That is one of the traditional reasons for making a winding- up order under the just and equitable ground: see 1 Palmer’s Company Law, 22nd ed., para 81-08, at 887 (1976); and Re Peruvian Amazon Co. Ltd (1913), 29 T.L.R. 384…”, as well as Cheryll Richards J in Madera Technology Fund (CJ), Ltd (FSD unreported judgment 3 November 2021), which stated at [76] that “It is accepted that the need for an investigation can be free-standing basis for the making of a winding up order on the just and equitable ground.

The learned judge in Seahawk also cited to Ingrid Mangatal J in Washington Special Opportunity Fund, Inc (FSD unreported judgment 1 March 2016), which at [122] referred to Parmalat, GFN and ICP Strategic Credit Income Fund Ltd (FSD unreported judgment 10 August 2010) as “leading Cayman cases on this area”, adding thatThese, and other cases, demonstrate that it has been accepted in this jurisdiction that the need for an investigation into the affairs of a company can be a free-standing basis for the making of a winding-up order on the just and equitable ground…

The judge in Seahawk was conflicted, perhaps because it might be said that if an investigation should constitute a separate and distinct basis for winding up then it could have relatively easily been spelt out in the statute. He was conscious however of the weight of the previous first instance decisions in Cayman and at [75] of his judgment said this: “For my part I note the local authorities (see for example Parker J in Padma Fund L.P., FSD unreported judgment 8 October 2021 at paragraph 84 and Limited 2012 (1) CILR 272 Cresswell J) to the effect that a decision of another judge of the FSD should be followed unless the subsequent judge is convinced it is wrong".

Ultimately however, as with the Court of Appeal in GFN, Doyle J did not need to decide the point and held at [80] that: “It will be seen from the determination section of this judgment that I do not, in the circumstances of this case, need to resolve the issue as to whether the need for an investigation is a free standing basis for a winding up order and I leave it open for determination by wiser heads than mine in another case should the need arise. Suffice for me to say at first instance that I am not presently convinced that my fellow first instance judgments in GFN, Parmalat, Paradigm, Madera, ICP and Washington were plainly wrong on this point."

Where Are We Now: The Right Case?

The latest decision in In the Matter of Aubit International FSD 0271 of 2023 (DDJ) perhaps best illustrates the current state of play.

In Aubit, the petitioners presented a petition for winding up a Cayman Islands company pleading that:It is just and equitable that the Company should be wound up on the basis that there is a need for an independent investigation into the affairs of the Company.” 

The Court’s judgment held at [35] that “There is a weight of first-instance authority as outlined in Seahawk China Dynamic Fund (FSD 23 of 2022 (DDJ), unreported judgment 9 August 2022) at paragraphs 63-80 to the effect that the need for an investigation can be a free- standing basis for a winding up order. Asia Private Credit Fund 2020 (1) CILR 134 provides some appellate support, albeit by way of a footnote (footnote 9) and perhaps without the benefit of full argument. In the circumstances of this case, however, I am satisfied that it is appropriate to make a winding-up order on two grounds namely, the inability to pay debts ground and the just and equitable ground.” In essence, therefore, the Court in Aubit once again demurred on a definitive decision on whether there was a freestanding ground for investigation to wind up a company, but nonetheless went on to make an order. 

The Cayman Courts have often applied persuasive case law in innovative ways, and have not shied away from being pragmatic and commercial when necessary. Notwithstanding that there is no definitive pronouncement at least from the higher courts in Cayman establishing a separate basis for winding up premised upon a need for an investigation, where the evidence demonstrates a real need for an investigation, but falls short in other respects, in the right instance, the Cayman Courts may well be prepared to wind up the company.

This article first appeared in the April 2024 issue of the Hong Kong Lawyer, the official Journal of The Law Society of Hong Kong.