Cayman Court Exercises Its Just And Equitable Jurisdiction To Wind Up A Captive Insurance Company

• Published date: 24 February 2022
• Subject Matter: Corporate/Commercial Law, Insurance, Corporate and Company Law, Insurance Laws and Products
• Law Firm: Campbells
• Author: Mr Liam Faulkner

In a recent judgment in the matter of Virginia Solution SPC Ltd, the Grand Court of the Cayman Islands ordered that a captive insurance company of two substantial Virginia based not-for-profit health care systems be wound up on the just and equitable ground on the basis that (i) the Company was a corporate quasi-partnership and (ii) the relationship of mutual trust and confidence between the two members had irretrievably broken down.

Where a company is a "quasi-partnership" it is just and equitable to take into consideration the legitimate expectations of members about how the company will be run, even though those expectations are not expressed in the company's constitution or the Companies Act. The Court's power to grant equitable relief is therefore enhanced where it is satisfied that the subject company is a quasi-partnership, as recently confirmed by the Privy Council in Chu (Respondent) v Lau (Appellant) [2020] UKPC 24, a decision handed down in October 2020 on appeal from the BVI.

Following a two-week trial, including six full days of cross-examination, the Court found that the breakdown in the relationship was entirely due to the stance taken by the Respondent, Augusta Health Care Inc., which the Court found had acted in bad faith in refusing to follow the Actuary's advice with respect to the amount of dividends to be declared as part of a documented plan devised in 2017 to drive Valley Health System, the member with a 69% economic interest in the Company, out of the captive in order to remain as the "last man standing" and receive a financial windfall.

The plan was reduced to writing in a six-page internal document prepared by Augusta's CEO, who was one of two directors on the Company's Board, in October 2017 and produced on discovery titled the "Confidential Debrief" which the Court found "laid bare the insincerity of Ms Mannix's evidence-in-chief that Augusta "was not guided by greed" but was acting consistently with the Company's conservative principles when deciding to approve dividends". Contrary to the position which three of Augusta senior executives had advanced in evidence under oath, the Court found that all of Augusta's decisions with respect to dividends after March 2017 were driven by Augusta's decision not to deal with a US$6 million portion of the Company's retained earnings in accordance with the contractual Dividend Policy, which the members had affirmed as recently as February 2017. Augusta did so in order to leverage Valley Health into receiving a greater share of those retained earnings than Augusta was otherwise entitled to receive under the Dividend Policy. The Court found that Augusta did so in bad faith and in doing so impeded Valley Health's legitimate expectation that dividends would be declared in good faith having regard to the advice of the Actuary and in accordance with the long standing Dividend Policy.

The decision is understood to be the first occasion on which the Cayman court has exercised its just and equitable jurisdiction to wind up a captive insurance company thereby confirming the well-established principle that the Court's just and equitable jurisdiction is wide and untrammelled and that the Court will intervene where it is equitable to do so.

Liam Faulkner of Campbells acted for the successful Petitioner, Valley Health System, instructing Robert...