The Standing Of Redeeming Investors To Petition For Winding Up In The Cayman Islands

KEY POINTS

The liquidity crisis of 2008 produced a number of cases in which the Cayman courts resolved the tensions which had arisen between funds which had suffered from reduced liquidity and investors seeking to redeem their investments. The usual vehicle for the resolution of such tensions is the winding up petition. A key question which arises in a number of such petitions is whether the petitioner – a shareholder who has redeemed their investment but has not been paid out – has standing to petition as a creditor of the fund, or whether the petitioner has to rely on the just and equitable ground.

the Privy Council decision in the Strategic Turnaround litigation decides that whether the investor can petition as a creditor turns on the terms of the investment agreement; standing to petition as a creditor gives the investor a significant advantage; investors who seek winding up relief on the just and equitable ground to resolve disputes which do not affect the rights the investors as a class need to consider carefully, in light of the decision of the Cayman Islands Court of Appeal in In the matter of Camulos Partners Offshore Ltd, whether they can obtain effective relief through some alternative legal process; the Grand Court has given the 'loss of substratum' ground for winding up a broader base in recent winding up petitions brought under the ' just and equitable' ground. When the waves of the global credit liquidity crisis broke over the beaches of the offshore financial centres, many Cayman funds fought to keep the potentially calamitous consequences of that crisis at bay by suspending redemptions and the payment of redemption proceeds, and using other workarounds such as making distributions in specie to reduce the demands on their own liquidity. The ready use of these tools by funds during the crisis period, and the resultant tensions this created with investors also in need of liquidity, has resulted in a number of decisions which have considered the ability of redeeming investors to petition to wind up the funds in which they are invested or from whom payment of redemption proceeds is awaited.

This feature will look at some of the more recent authorities from the Cayman Islands which have sought to resolve these tensions, including the decision of the Privy Council in Culross Global SPC Limited v Strategic Turnaround Master Partnership Limited and the Court of Appeal's decision In the matter of Camulos Partners Offshore Ltd [2010 (1) CILR 303] which struck out a winding up petition brought by a redeeming investor on the ' just and equitable' ground.

STANDING AND GROUNDS TO PETITION FOR WINDING UP IN THE CAYMAN ISLANDS

The Cayman Islands winding up regime is contained in Pt V of the Companies Law ('Law') and the Companies (Winding Up) Rules. So far as material, the Law provides that a company may be wound up by the court if the company is unable to pay its debts or the court is of opinion that it is just and equitable that the company should be wound up.

The categories of who may petition to wind up include creditors (and by an extension of the Law after the Strategic Turnaround litigation began, includes prospective or contingent creditors) and contributories (shareholders, whether fully or partly paid).

On the hearing of a winding up petition, the court may grant or dismiss the petition, make a provisional order, or make any other order it thinks fit. By an amendment introduced in 2007 which came into force in 2009 as s 95(3) of the Law, the court is also given the power, on hearing a petition brought by contributories on the ' just and equitable' ground, to make an order which provides alternative relief to winding up, including orders which regulate the future conduct of the company's affairs, restrains the company from doing or compels the company to perform an act, authorises the commencement of litigation by the petitioner in the name of the company, or orders the purchase by other members or the company itself of the petitioner's shares.

STRATEGIC TURNAROUND

In Strategic Turnaround the investor ('Culross') subscribed for US$1.84m of shares in the fund. It gave notice to redeem its investment and a redemption date of 31 March 2008 was agreed for the redemption. That redemption was approved for 31 March 2008 and 90 per cent of the redemption proceeds were to be paid within 30 days, with the balance following the fund's audit.

Following the expiry of the redemption notice, the fund's board decided to suspend all redemptions in light of volatility and illiquidity in the US micro-cap turnaround sector. The fund also purported to suspend the payment of redemption proceeds to redeeming investors.

The fund therefore did not pay Culross the redemption proceeds as agreed, and on 10 June 2008 Culross petitioned for the fund to be wound up on the basis that it was a creditor of the fund and that the fund was unable to pay its debts. The fund sought to strike out the petition as an abuse of the process of the court, arguing that Culross was not a creditor because the fund had no present obligation...