In a widely discussed Cayman Grand Court decision, Justice Mangatal parted company with one of her fellow judges by declining to follow Justice Jones's first-instance judgment in Re China Milk Products Group Ltd [2011], instead striking out a winding-up petition filed by the directors of China Shanshui Cement Group Limited (a Cayman company listed on the Hong Kong Stock Exchange) for lack of standing.
Mangatal felt unable to endorse the court's strained construction of Section 94 of the Companies Law (2013 Revision) in China Milk, which for the last four years has relieved directors of insolvent Cayman companies of the obligation to seek a resolution of the company's shareholders in a general meeting before filing a winding-up petition (or, by extension, an application for the appointment of provisional liquidators) in the Cayman courts.
The application to strike out the petition was made by China Shanshui Investment Company Limited, a shareholder in the company, and supported by fellow shareholder Tianrui (International) Holding Company Limited. The application was made following allegations of bad faith in circumstances where the filing of the petition itself was said to be responsible for accelerating liabilities to bondholders of the otherwise solvent company. Notwithstanding an offer by the company's largest shareholder to pay all liabilities to creditors in full, the petitioning directors – who had been heavily criticised by the Hong Kong court for their conduct in ongoing litigation with the shareholders – argued that provisional liquidators should be appointed urgently and given far-reaching powers designed to prevent the majority shareholders from reconstituting the board in a general meeting.
The decision re-establishes the principles set out in the English case of Re Emmadart Ltd [1979] as good law in the Cayman Islands. The effect of the judgment, in combination with the wording of Section 94 of the Companies Law, is that only companies incorporated after March 1 2009 and with appropriately worded articles of association are excused from seeking a resolution of their shareholders before petitioning for their own winding up.
New companies are largely unaffected by the decision, since they are expressly permitted by the Companies Law to deal with the issue in the drafting of their articles. However, the resulting status quo is likely to cause some difficulties for directors of existing insolvent companies who feel that the interests of the company's creditors are best served by appointing provisional liquidators to propose a restructuring plan. In such cases, shareholders with arguably no legitimate interest in the future of a company will still have a say in whether a restructuring can take place.
At a time when many companies are looking to explore restructuring opportunities in order to preserve value, it is to be hoped that the legislatures take this opportunity to introduce new provisions into the Companies Law to provide assistance to directors in their duty to take into account the interests of creditors and act without resolutions from the members.
For further information on this topic please contact Marc Kish or Paul Madden at Harney Westwood & Riegels by telephone (+1 345 949 8599) or email ([email protected]). The Harneys website can be accessed at www.harneys.com.
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