Shining A Light On Validation Orders In Cayman Insolvency Proceedings

Synopsis

A recent judgment of the Cayman Islands Court of Appeal has provided certainty for directors, general partners and insolvency practitioners with respect to the principles that the Cayman Islands Courts will take into account in determining whether to grant a validation order in the context of Cayman Islands winding up proceedings. This article provides an overview of validation orders in Cayman Islands insolvency proceedings and a summary of the relevant factors to consider when making an application seeking a validation order.

Introduction

Under Cayman Islands law, if a winding up order is made, the winding up of a company is deemed to commence at the time of the presentation of the winding up petition for an official liquidation or the passing of the members' resolution in the event that a Court supervised liquidation commenced as a voluntary liquidation. 1 There will inevitably be a period of time that passes between the commencement of the winding up and the making of a winding up order. As such, a question often arises as to whether a company that is the subject of winding up proceedings can enter into valid transactions during that intervening period in circumstances where a winding up order is ultimately made by the Grand Court of the Cayman Islands (the 'Grand Court').

The answer can be found in section 99 of the Companies Law (2018 Revision) (the 'Companies Law'), which provides that:

'When a winding up order has been made, any disposition of the company's property and any transfer of shares or alteration in the status of the company's members made after the commencement of the winding up is, unless the Court otherwise orders, void.'

The requirements for obtaining a validation order (which can be sought either in advance or retrospectively) were recently considered and reaffirmed by the Cayman Islands Court of Appeal ('CICA') in In Re Torchlight Fund L.P. (Unreported, 27 April 2018, CICA). This article provides an overview of validation orders in Cayman Islands insolvency proceedings and summarises the applicable principles that the Grand Court will consider in determining whether to grant a validation order.

Purpose of Section 99

Pursuant to section 99 of the Companies Law, any disposition of the company's property, effects and things in action, or any transfer of shares held by the company and/or in the company or alteration in the status of the members of the company during the period between the commencement of the winding up and the making of the winding up order is void, unless the Grand Court grants a validation order. It follows that in the event that a winding up petition is dismissed and therefore no winding up order is made, section 99 will not affect a transaction entered into following the presentation of such winding up petition (although noting that the relevant transaction could potentially be successfully challenged by a liquidator in the future pursuant to an alternative antecedent transaction section of the Companies Law should a winding up order be granted on a further winding up petition2).

Section 99 seeks to void any transfer of a company's property which would have the result of diminishing the 'pot' of assets...