Re HQP Corporation Limited (In Official Liquidation) ' A Lifeline For Unredeemed Investors In Cases Of Substantial Corporate Fraud

• Published date: 19 July 2023
• Subject Matter: Corporate/Commercial Law, Wealth Management, Criminal Law, Offshore Financial Centres, White Collar Crime, Anti-Corruption & Fraud, Shareholders
• Law Firm: Appleby
• Author: Mr Andrew Jackson and Ross McLeod

Given the Cayman Islands' status as a leading offshore financial centre and home to a very significant number of corporate investment vehicles, as with all other financial centres (both on and offshore), it is perhaps inevitable that there will be some cases, from time to time, where investors in a Cayman company have been the victims of a fraud. And in some of those cases, the picture painted on the basis of the (then undiscovered) fraud is likely to have been what persuaded investors to subscribe.

In such a case, once the fraud has been discovered, it is unlikely to be very long before the company is put into liquidation. But the issue for shareholders who were led to invest in the company on that basis has been whether, once it is put into liquidation, they continue to have a viable claim against it for misrepresentation.

That issue had remained undecided in the Cayman Islands until the recent decision of the Grand Court in Re HQP Corporation Ltd (in Official Liquidation) ¹. In that case, Doyle J was required to decide whether the "Rule in Houldsworth" - laid down by the English House of Lords almost 150 years ago in Houldsworth v City of Glasgow Bank ², to the effect that a shareholder could not sue the company on such a claim once the winding up order had been made - should be applied in the Cayman Islands.

Although the Cayman courts have long-recognised that English common law was received into these Islands no later than 1865, such that Houldsworth cannot possibly have formed part of Cayman Islands common law, it is nonetheless common for English decisions since 1865, particularly at an appellate level, to be treated as persuasive and be followed by the Cayman courts, at least where there are no clear reasons to do otherwise. Doyle J thus considered in detail the judicial and academic treatment which the Rule in Houldsworth has received over time in England and various Commonwealth jurisdictions.

Doyle J observed inter alia that the Rule in Houldsworth has been overridden by statute in the UK, other courts across the Commonwealth have declined to follow it, and it has attracted criticism from various quarters. Moreover, the Judge considered that to apply the Rule in Houldsworth would be to introduce an inappropriate restriction on the breadth of...