Cayman Islands Court Of Appeal Validates Test Under Section 99 Of The Companies Law

The Cayman Islands Court of Appeal has provided much needed clarification of the test for validating certain transactions by companies that are subject to a winding up petition, pursuant to section 99 of the Companies Law (2020 Revision) (the "Companies Law").

The Legal Issue of Principle

Section 99 operates to bring down a curtain from the date of presentation of a winding up petition which operates as the “commencement of the winding up”. All dispositions of property and alterations in the status of members are “void” for all purposes of the liquidation from that date (rather than the later date when a winding up order is actually made), unless a Court is prepared to make a “validation order”. Since Section 99 only takes effect retrospectively, if and when a winding up order is made there is no certainty before the making of the order that transactions will, in fact, ever be avoided. Until the petition is heard the company and its counterparties are in a form of legally uncertain twilight zone which, in practice, means it may limit business. That prejudicial uncertainty, caused by the mere presentation of a winding up petition, may last for some considerable time, especially in the case of just and equitable petitions.

It is therefore important that during that period of uncertainty the Court is able to provide relief by validating transactions. The problem is that there has thus far been no attempt to identify a comprehensive statement of principle that can apply both to an insolvent winding up and a just and equitable petition. The textbooks and many of the cases deal with the Section 99 validation of dispositions only in the context of creditors' petitions and have often expressed the purpose of the Court's discretion to preserve the pari passu principle of distribution (see McPherson & Keay's Law of Company Distributions 4th ed 7-07). Thus, in the case of an insolvent winding up a Court would make an order when there was no risk to creditors, but that does not say anything about the winding up of solvent companies.

There is only very sparse English case law on the principles to be applied in just and equitable petitions. In Re Fortuna Development Corporation [2004-05] CILR 533, Re Cybervest Fund [2006] CILR 80 and Re Torchlight [2018] (1) CILR 290, the Cayman Courts have considered making validation orders when transactions were in the ordinary course of business but have not previously given guidance on other types of transaction...