In an important decision for the jurisdiction and for investment funds in particular, the Grand Court has upheld the novel use of a receivership over shares in Cayman investment funds to enable the beneficial owner of those shares to access statutory shareholder protections. A significant proportion of beneficial owners of participating shares in Cayman investment funds hold their shares through nominees, meaning that they do not themselves have standing to commence winding up proceedings in their own name. This has formed a practical barrier to those owners accessing shareholder remedies where their nominees are unwilling or unable to act. This was particularly problematic where there were serious concerns of wrongdoing in the management of the relevant fund.
Appleby were successful in overcoming this practical barrier by first obtaining a novel ex parte order for the appointment of receivers to pursue the winding up of three related Cayman investment funds and then ex parte orders for the appointment of provisional liquidators to protect the assets of those funds pending the hearing of the petitions – and resisting challenge to those appointments.
In a recent judgment of the Grand Court of the Cayman Islands handed down on 8 April 2022 (“Judgment”), the Hon. Mr Justice Doyle dismissed applications made by the management shareholders in three related Cayman investment funds (“Floreat Funds”) in which they sought to challenge the ex parte appointment of receivers to pursue winding up petitions in relation to the funds and the ex parte appointment of provisional liquidators over those funds.
Appleby acted on behalf of:
- the Plaintiff, Mr Wang, in proceedings brought against Credit Suisse London Nominees Limited (“Nominee”) and Credit Suisse AG (“Nominee Proceedings”) in which receivers were appointed over shares in the Floreat Funds; and
- the Receivers (Mr Michael Pearson and Ms Trudy-Ann Scott of FFP) who brought just and equitable winding up petitions in the name of the Nominee in relation to each of the Floreat Funds.
- An endorsement of the novel use of receivers as a route to protect the interests of a beneficial owner of shares in a Cayman investment fund where the registered shareholder is unwilling or unable to petition for the winding up of that company (see paragraphs 51 to 52);
- A clear statement, as a matter of Cayman Islands law, of the bounds of the duties of full and frank disclosure and fair presentation on ex parte applications (see paragraphs 16 to 33);
- An important reminder to those seeking to discharge ex parte orders of the need to act proportionately and to avoid taking an inappropriate ‘scattergun’ approach to making allegations of breach of the full and frank duties (see in particular paragraphs 3(2), 29, 32, 39, 54(11), 57);
- Welcome guidance to practitioners on the preparation of skeleton arguments / affidavits and the use of authorities, for both these types of applications and more generally (see paragraphs 1 to 3).
On 8 September 2021, on an ex parte application by Mr Wang, the Grand Court made an Order appointing receivers over shares in each of the Floreat Funds held by the Nominee for Mr Wang as beneficial owner (“Receivership Order”). This order was expressly made to enable the Receivers to commence winding up proceedings in the name of the Nominee (the registered legal owner of the relevant shares in the funds) and to apply for the appointment of provisional liquidators over those funds.
The Receivers then filed winding up petitions (“WUPs”) in the name of the Nominee in relation to each of the Floreat Funds and applied ex parte for the appointment of provisional liquidators. On 17 September 2021, the Grand Court made ex parte orders for the appointment of joint provisional liquidators over the Floreat Funds (“PL Orders”).
Following service of the WUPs and PL Orders, the management shareholders in each of the Floreat Funds (“Floreat Managers”) filed an application on 6 October 2021 seeking to discharge the PL Orders primarily on the basis of alleged wholesale breaches of the full and frank duties in obtaining the ex parte orders.
On 10 February 2022, the Floreat Managers also filed an application to intervene in the Nominee Proceedings and to discharge the Receivership Order, again primarily on the basis of similar alleged breaches of the full and frank duties.
These applications were heard together by the Hon. Mr Justice Doyle at a hearing held on 23 to 28 March 2022.
In the Judgment, the Hon. Mr Justice Doyle dismissed all of the applications made by the Floreat Managers and decided to continue both the Receivership Order and the PL Orders pending the hearing of the WUPs.
The Floreat Managers’ application to intervene in the Nominee Proceedings was initially brought under GCR Order 15 rule 6(2)(b)(i) and/or (ii). The Judge held that it was not appropriate to permit the Floreat Managers to intervene in the Nominee Proceedings. Noting that no relief was claimed against the Floreat Managers in those proceedings and any orders made in those proceedings would not determine any of their rights or obligations, the Judge held that:
- Their presence before the Court was therefore not necessary to ensure that all matters in dispute in those proceedings may be effectively and completely determined and adjudicated upon; and
- It was not just and convenient in those proceedings to determine any questions or issues arising out of or relating to or connected with any relief or remedy claimed in those proceedings and the Floreat Managers.
Further, in relation to an alternate basis for joinder raised by the Floreat Managers at the hearing, the Judge held that the Floreat Managers could not use the standard ‘liberty to apply’ provision in the Receivership Order – “Anyone served or notified of this Order may apply to the Court at any time to vary or discharge the Order (or so much of it as affects that person)…” – to gain standing, as this still required them to show that they have sufficient interest to be able to obtain a variation or discharge of the order. The Judge held that the Floreat Managers did not have such an interest, having found that the Receivership Order did not require them to do anything and did not impact upon their rights and obligations.
Having set out (at paragraphs 16 to 31) the key authorities relating to the full and frank duties arising on ex parte applications, the Judge summarised the key principles (at paragraph 32), including that “a due sense of proportion must be kept and sensible limits have to be drawn especially in complex and heavy commercial cases where applicants may be attempted to abuse the principle and take an inappropriate scattergun approach”.
Applying these key principles to the discharge applications made by the Floreat Managers, the Judge dismissed both applications, holding:
- In relation to the Receivership Discharge Application (at paragraph 40), that there was “nothing in” the grounds of attack.
- In relation to the PL Discharge Application (at paragraph 55) “…there is no substance to the [Floreat Managers’] wide ranging allegations of lack of proper disclosure and lack of fair presentation.”
In what is believed to be the first case of its kind in the Cayman Islands, this decision confirms the availability of a novel route for beneficial owners of shares in Cayman companies to access statutory shareholder remedies where those shares are held through nominee structures where those nominees are unwilling / unable to act. The endorsement by the Grand Court of the use of a court appointed receiver over shares in a Cayman investment fund to enable the beneficial owner of those shares to cause just and equitable winding up proceedings to be brought in the name of the legal owner is a welcome one for the jurisdiction. This mechanism enables a beneficial owner to bring concerns relating to wrongdoing before the Cayman Courts and – in appropriate circumstances – to obtain the protection of a provisional liquidation in the interim. This is of particular importance as, where there are allegations of wrongdoing, those involved in the management of the funds: a) could potentially block a transfer to the beneficial owner or to a nominee that would be willing and able to act meaning that the wrongdoing would go unscrutinised; and/or b) would potentially be ‘tipped off’ as to the coming proceedings by any transfer. The Court’s approach demonstrates a keen focus on the interests of justice as the touchstone for the appropriateness of remedies that are designed to enable proper scrutiny of conduct in Cayman companies and the appropriate flexibility of the Court’s jurisdiction to appoint receivers.
The Judgment also emphasises the required meticulous approach to compliance with the full and frank duties arising on ex parte applications, noting the “great lengths” that had been gone to in discharging the “onerous full, frank and fair disclosure obligations” (paragraph 58). Referring to the extensive evidence and submissions (both written and oral) dedicated to this issue at the ex parte hearing, the Judge observed that “Those responsible for discharging the obligation of full, frank and fair disclosure plainly took their obligations seriously”.
Importantly, the decision re-emphasises that, notwithstanding the important nature of the full and frank duties falling on an ex parte applicant, due restraint must be shown by those alleging breach of those duties so as to enable the Court to deal with matters efficiently and proportionately. The Judgment referred repeatedly to the “scatter gun” and “kitchen sink” approach adopted by the Floreat Mangers. Practitioners should take note that the Judgment expressly sets out for “future reference” that “…a “scattergun” approach in discharge applications relying on alleged non-disclosure and lack of fair presentation is not appropriate” (paragraph 3(2)).
Finally, this decision provides welcome guidance to practitioners on the approach expected from the Grand Court in terms of the preparation of evidence, skeleton arguments and the citation of authorities (paragraph 3). The overarching message from the Court on all fronts was that the parties and their legal advisors must keep the key principles of proportionality and relevance front and centre in their minds at all times when preparing for and arguing matters before the Grand Court.
Please do get in touch with David Lee, David Lewis-Hall or your usual Appleby contact should you require further information on this matter.