An 'Unprecedented' Just & Equitable Winding Up Of A Solvent Cayman Islands' Captive ' Re Virginia Solution SPC Ltd

• Published date: 02 May 2022
• Law Firm: Appleby
• Author: Mr Sebastian Said and Conal Keane

In what we understand to be an 'unprecedented' judgment handed down in February (linked here), the Grand Court ordered the winding up of Virginia Solution SPC Ltd (Virginia or the Company), a Cayman Islands captive insurance segregated portfolio company (SPC), despite Virginia's clear solvency.¹

The decision is a commercially significant one, given that, reportedly, the Cayman Islands is the second largest domicile for captive insurance companies worldwide and holds the number one position for healthcare sector captives in particular.²

The decision also comes at a time when the Grand Court's Financial Services Division has seen a steady flow of Winding Up Petitions being filed which seek compulsory winding up on the just and equitable basis.³

The Law

Under section 92(e) of the Companies Act, a company may be wound up "if the Court is of the opinion that it just and equitable to do so."

Although it is well established that the words of the just and equitable clause are not to be constrained by particular categories from previously decided cases - as to when it will be just and equitable for the Court to wind up a company ⁴ - there are a series of well-recognised types or categories of cases where winding up may be ordered by the Court exercising its jurisdiction under section 92(e).

They include:

1. fraudulent promotion of a sham or bubble company ⁵
2. loss of the company's 'substratum' where continuing the business of the company consistently with the expectation of members is, in a practical sense, impossible, ⁶ or (perhaps only in the case of open-ended investment funds) "impractical, if not impossible"; ⁷
3. deadlock in management; ⁸
4. constitutional vacuum (e.g. lack of any director or anyone willing to act as such, the lack of a quorum, among the members, to hold meetings as required, the bankruptcy of sole directors and members who could not be traced); ⁹
5. justifiable loss of confidence in management on grounds of lack of probity; ¹⁰
6. need for an investigation (in Cayman, but not English, law) ¹¹ and
7. failure to run the company in accordance with legitimate expectations, even though those expectations are not reflected in the constitutional documents of the company - including cases of 'quasi-partnership' - where there has been found to be a mutual relationship of trust and confidence of a personal character, and the relationship has irretrievably broken down ¹²

The Virginia case was concerned mainly with issues of 'quasi-partnership', ¹³ and disregard of legitimate expectations. ¹⁴ A further ground of deadlock was not determined in light of the Court's other findings. ¹⁵

While the respondent to the Petition argued that a winding up order should only be made against a solvent Cayman captive insurer in "truly exceptional" or "truly egregious circumstances", having regard to public policy and public interest in the Cayman Islands promoting itself as an attractive jurisdiction for the establishment of captive insurers, the Court disagreed that such considerations were relevant to its inherent discretion to grant the order, in the circumstances.¹⁶

The presiding Judge, the Hon. Justice Ramsay-Hale, emphasised, applying the leading case-law, that the Cayman Courts "should not be too timorous" in giving the words of the Companies Act their "full force". ¹⁷

The Case

Virginia Solution SPC Ltd (Virginia or the Company) is a captive insurance company of two large US-based not-for-profit health care system providers (referred to herein as Valley Health and Augusta).

Valley Health and Augusta had co-operated since becoming the two remaining members of the Company in 2014. However, a dispute arose in or around 2017, when Augusta refused to approve a dividend recommended by the Company's Actuary who had followed a pre-agreed process set out in the Company's Dividend Policy. Augusta formed the view that $6.3 million of the retained earnings should not be allocated according to the dividend formula but, instead, shared equally between Valley Health and Augusta. ¹⁸ This issue formed a wedge between the parties and...