Grounds for winding up/bankruptcy

Many offshore jurisdictions have dug into the foundations of proposed winding-up petitions to determine if a winding-up is indeed appropriate. In Guernsey in In the matter of Canargo Limited, the Royal Court heard what is understood to be the first application in Guernsey to seek to place a company into liquidation, for failure to provide a member of the company with a set of accounts, in accordance with the provisions of section 251 of the Companies (Guernsey) Law, 2008, as amended.

The applicant was a registered owner of 25% of the issued share capital in Canargo Limited which was beneficially owned by a Mr Isaak (a former director who was removed against his will). The other 75% of the share capital was held directly or indirectly by or on behalf of Mr Ramsay, who was the sole director of the company. Mr Ramsay failed to provide evidence to contest the hearing nor did he attend. As such, the court was not provided with any reasons as to why the accounts had not been provided, which would have to be taken into account in the exercise of the court’s discretion. The decisive facts considered by the court were that the request had been outstanding for some time. The proceedings were issued more than a few months before the hearing. The company had had the opportunity to comply with its statutory obligations and had failed to do so. There was nothing to be achieved by allowing the company more time for compliance. Despite noting that the liquidators would have difficulties in discharging their duties, the court granted the application and liquidators were appointed.

In Jersey, in Representation of Private Equity Fund Finance Limited, the Royal Court was asked to wind up a Jersey limited partnership, in circumstances where the limited partnership agreement did not contain provisions for the winding up of the partnership. The general partner had been struck off for failure to file its annual return. Notwithstanding the fact that the directors of the general partner had apparently been assured that this would result in the company going into a state of suspension, the Royal Court held that – pursuant to Article 24 of the Limited Partnerships (Jersey) Law 1994 – the effect of the striking off was the dissolution of the limited partnership.

In such circumstances, one of the limited partners (which was the largest capital contributor to the limited partnership) was entitled to ask the court to make directions for the winding up of the partnership under the provisions of the Limited Partnership Law. The court accordingly directed that the assets of the partnership be transferred to the applicant, which was authorised to collect and realise the assets of the limited partnership. As the assets were insufficient to pay the creditors in full, the applicant was ordered to return to court for further directions, prior to the making of any payment to creditors.

In the Cayman Islands, the court was asked to consider making winding up orders in In the Matter of China Hospitals Inc & China Healthcare Inc, in spite of arguments from both companies that the underlying debt, which amounted to approximately USD175 million and was based on a final arbitration award in Hong Kong, was disputed, and alternatively, that the petitions should be adjourned pending an appeal of the final award. The basis for disputing the debt was the assertion by the companies’ principals that they had been unable to present their case during the arbitration and that the award was in conflict with the public policy of Hong Kong.

The court decided to grant the winding up orders and refuse the adjournment applications. The court noted that the mere fact that the final award was being appealed was insufficient to justify a conclusion that the debt was disputed on substantial grounds. The petitioner was prima facie entitled to immediate winding up orders on the insolvency ground. The court cited the general rule that the court is not normally concerned to decide any alleged dispute, only to determine whether a dispute on substantial grounds exists. The burden was on the companies to establish the substance of the dispute they raised and they failed to do so in this matter.

The court also took the view that there was strong legal policy in favour of upholding final arbitration awards in countries which are party to the New York Convention (such as Hong Kong). The judgment demonstrates that a winding up petition grounded on an unsatisfied final arbitration award will not be defeated unless robust evidence is produced to demonstrate a dispute on substantial grounds (e.g. very serious departures from the rules of natural justice).

An unsatisfied arbitration award also formed the basis of the winding up in another Cayman Islands case, In the Matter of Matrix Inc. The company, Matrix Inc., had referred a dispute with Heathcliff Trading S.A. over the sale of a quantity of selenium to arbitration in Geneva. The arbitral award required Heathcliff Trading to return or procure the return of the selenium to the company within 30 days and ordered Matrix to pay Heathcliff sums in excess of CHF 7.4 million. Despite demands, the company failed to make the payment and Heathcliff presented a winding-up petition as creditor, on the grounds that the company was unable to pay its debts. The company argued that the petition debt was disputed because the payment obligations were inextricably linked with the petitioner’s non‐monetary obligations to return or procure the return of the selenium to the company. However, the company adduced no credible evidence of its solvency or its ability and/or willingness to pay the sums due if the petitioner facilitated the return of the relevant goods.

The court considered that a foreign arbitral award is to be interpreted according to the plain and obvious meaning of its terms, thereby giving it an autonomous interpretation without recourse to national law. The terms of the arbitral award were clearly in favour of the petitioner’s transfer obligations and expressed an intention to impose unconditional payment obligations on the company. The court therefore granted the winding-up petition.

Although Mauritius is also a party to the New York Convention, a rather different approach to foreign arbitral awards was shown by the Commercial Division of the Supreme Court in Weston International Asset Recovery Company Limited v. Chilton and anor, in which it considered the issue of whether a foreign award could by itself form the basis of a statutory demand. It was held that a foreign arbitral award did not confer a ‘titre exécutoire’ i.e. executory title in order to pursue the statutory demand. Indeed, it took the view that first, the Respondent should obtain an order of exequatur to give effect to the foreign arbitral award or judgment before the Supreme Court in order that a statutory demand based on it could proceed before a Mauritian court.

Last minute attempts to adjourn the hearing of a winding up petition were rejected by the Cayman Court in In the Matter of Harlequin Hotels and Resorts Ltd. The background to the case involved investors attempting to recoup funds in the Harlequin Group in connection with an alleged scam which led to a publicised Serious Fraud Office enquiry in the UK and civil proceedings in England, Ireland, St. Lucia, and Saint Vincent and the Grenadines. The St Vincent member of the Harlequin Group issued a statutory demand against Harlequin Cayman, seeking repayment of an inter‐company debt. Although the company admitted the debt, it asserted a right to net off the debt against various other inter‐company debts without providing a credible legal or factual basis for this exercise. However, the petition appeared to be unopposed, until the eleventh hour, when counsel appeared and sought an adjournment in order to file evidence. In the exercise of its discretion, the court ordered that the company should be wound up and refused the company’s application to adjourn the petition. The court made clear that in the Cayman Islands there is no entitlement as of right to an adjournment of a winding up petition, particularly at the last minute, and investigating the affairs of an insolvent group of companies may constitute grounds for a just and equitable winding up order separate and apart from the company being insolvent.

Turning to individual insolvency, in Lloyds Bank International v. Alder, the court in the Isle of Man set out the legal test that the court will use when deciding whether or not to adjudicate someone as bankrupt, or whether to postpone the adjudication under section 6 of the Bankruptcy Procedure Act 1892, the proposed bankrupt having made a last-minute offer to settle the outstanding debt. The court outlined the principles that it takes into account, including whether a reasonable hypothetical creditor in the position of the petitioning creditor would accept or refuse the offer, the extent to which the reasonable hypothetical creditor may be taken to have the characteristics of the petitioning creditor, the position at the date of the hearing and all the relevant factors and their impact on the reasonable hypothetical creditor. The court also stated that the debtor must be full, frank and open in providing the necessary information to enable the creditor to make an informed decision and a rigid institutional policy of rejecting offers to secure, could be a relevant consideration, since the reasonable hypothetical creditor was obliged to consider an offer on its merits. However, a creditor is entitled to have regard to his own interests and is not obliged to ‘take a chance, or to show patience or generosity’. The cost and resource implications for the creditor are a ‘highly material consideration’. In all the circumstances of the case, the court concluded that a reasonable hypothetical creditor would have refused the offer made by the proposed bankrupt as reasonable and refused to agree to a postponement of the adjudication. The court remarked in its decision that the case had been ongoing for almost four years and a further postponement of adjudication would not be in the interests of the petitioning creditor, other creditors, the proposed bankrupt or the public and therefore adjudicated Alder as bankrupt.

Powers and Duties of Office Holders

In the Cayman Islands, the court was asked to consider important issues relating to the appointment of liquidators. First, the ability to obtain recognition and assistance at common law by foreign provisional liquidators was considered in In the matter of Changgang Dunxin Enterprise Company Limited. In this case, Hong Kong provisional liquidators of a Cayman company sought an order from the Cayman Court permitting them to act in the name and on behalf of the company. This was for the purpose of making an application to the Cayman Court for the winding up of the company and to seek their appointment as official liquidators in the Cayman Islands. The court held that it was appropriate to grant the Hong Kong provisional liquidators recognition to act in the name and on behalf of the company for these purposes, referring to the fairly recent Cayman decision of China Agrotech which involved similar issues and facts.

In Jersey, in Smith v Nedbank, the Royal Court considered whether it was necessary first for the appointment of an insolvency office holder, such as a Trustee-in-Bankruptcy, first to be recognised in Jersey through the issue of a letter of request to the Royal Court, before that office holder would have standing to apply to the Royal Court for a Norwich Pharmacal order. It was argued that an office holder should not have to expend the time and costs required to obtain recognition in Jersey, solely to have locus standi to make the application.

The Royal Court disagreed, and held that the need by an office holder first to obtain recognition from the Royal Court was a fundamental element of the court’s ability to control or oversee the actions of a foreign office holder in Jersey. In cases of great urgency, an application could be made to the Royal Court for interim recognition, with an undertaking to procure the issue of a letter of request from the foreign court promptly thereafter.

In the Cayman Islands, in Re Alpha Ltd, the court was concerned with a petition for a voluntary liquidation to continue under the supervision of the court and a challenge to the identity of the liquidators. Concerns were raised by major creditors about the appearance of a conflict. The court reviewed the applicable principles and held that it “must identify the relationship and determine whether it is capable of impairing the appearance of independence and, if so, whether it is sufficiently material to the liquidation in question that a fair minded stakeholder would reasonably object to the appointment of the nominated practitioner in question”. It was satisfied that there was a perception of bias and appointed the liquidators sought by the major creditors. The issue of conflict regarding the identity of liquidators was also discussed earlier in Re Wimbledon Fund SPC, but on that occasion the court, while looking at the same principles, was not convinced that there was a conflict.

There were also notable cases relating to the powers and duties of liquidators once in office. In Halabi v. Wilson and HMRC, the Jersey Court of Appeal shed some useful light on the intersection between tax information exchange agreements, insolvency and the rights of a trustee-in-bankruptcy.

The application was brought by the trustee-in-bankruptcy of Mr Simon Halabi, whose appointment had been recognised in Jersey and who had obtained, for the purposes of administering the bankruptcy, various confidential documents relating to Mr Halabi from Jersey financial institutions. Under the terms of the recognition order, the trustee was permitted only to use the confidential documents in connection with the administration of the bankruptcy. In Jersey law, breach of such an order is a contempt of court, and specific permission must be obtained from the court to use the documents for a different purpose.

The trustee, who was based in the UK, was subsequently issued with an information notice by HMRC in the UK under the Finance Act 2008, requiring production of those confidential documents. He sought leave from the Jersey Court to provide the confidential documents to HMRC.

Mr Halabi argued that the court did not have jurisdiction to grant leave, because the situation did not fall within the scope of Article 49 of the Bankruptcy (Désastre) Law 1990 (which governs assistance by the Jersey Court in respect of foreign insolvencies) and also because to permit disclosure of the documents to HMRC would allow HMRC to obtain documents to which it would not be entitled under the terms of the UK-Jersey tax information exchange agreement.

The Royal Court considered carefully the objections raised, but granted leave for the documents to be provided to HMRC. The Jersey Court of Appeal, in a similarly careful judgment, upheld the decision. It emphasised in particular the public interest in doing so, and the fact that the trustee had come under a legal obligation in the UK to produce the documents to HMRC.

The important issue of the ability of a liquidator to rectify the register of members was considered by the Court of Appeal in the Cayman Islands in In the Matter of Herald Fund SPC. The Court of Appeal unanimously allowed an appeal against Jones J’s first instance decision, permitting the liquidator of Herald to rectify its register of members due to the fund’s net asset value being impacted by the Madoff fraud. Jones J had held that Order 12, rule 2 of the Companies Winding Up Rules, could only be used if there had been a fraud by Herald itself, but that the liquidator could rectify the register under Section 112 Companies Law which contained a free-standing discretionary power. The Court of Appeal agreed that Order 12 Rule 2 was limited as Jones J had stated, but held that section 112 of the Companies Law could only be used to give effect to existing rights and not to override them. Rectification of the register was therefore not legally possible.

Finally, in the BVI in Kevin Gerald Stanford v. Stephen John Akers et al, the court was concerned with the ability of a party to reverse or vary a liquidators’ decision to admit a claim in the liquidation. Mr Stanford appealed the first instance decision that he had no standing to bring an application under section 273 of the Insolvency Act 2003 to reverse or vary the liquidators’ decision to admit a claim in the liquidation of Chesterfield United Inc. In dismissing the appeal, the Court of Appeal held that only a person aggrieved by an act, omission or decision of a liquidator, may apply to the court under section 273. A person aggrieved can be a contributory, a creditor, or a third narrow class of persons directly affected by the exercise of a power specifically given to liquidators, who would not otherwise have any right to challenge the exercise of that power. As Mr Stanford was not a member or creditor of Chesterfield (he was considered at most to be a shareholder of a shareholder of Chesterfield) and was held not to be within the third class of persons, he was not an aggrieved person for the purposes of section 273 and therefore had no standing to bring the application.

Office holders’ remuneration

Fee approval applications are frequent and in the BVI, in Re Unicorn Worldwide Holdings Limited the court considered its approach to these applications, which were well understood following the decisions in Re Rich Victory and in Re Titan. The court took a fresh look at those decisions and endorsed the approach of the former Commercial Court judge, Bannister J, that the court was to take a principled approach to liquidators’ remuneration and not a nit-picking line-by-line analysis, and that the value criterion applicable in England was not applicable in the BVI. However, the court also took the view that it is for the court, and not primarily for the officeholders, to determine the reasonableness of disbursements.

Creditors’ rights

The ability of creditors to claim statutory interest was determined in the Cayman Islands in In re Herald Fund SPC (in Official Liquidation). The general rule is that creditors’ entitlement to statutory interest can be claimed on all debts proved in the winding up following the commencement of liquidation, pursuant to section 149(1) of the Companies Law. However, an argument was advanced that this did not apply to debts (such as those due to redeeming but unpaid investors) which had been deferred and ranked behind those of ordinary, unsecured creditors.

The Grand Court decided that in the absence of express wording to this effect, redemption creditors are prima facie entitled to statutory interest, pursuant to section 149 of the Companies Law. The starting assumption must be that all creditors, including deferred or postponed creditors, qualify for statutory interest and section 49(g) of the Companies Law determines whether or not such claims are actually provable for the purposes of an enticement for statutory interest. In an insolvent liquidation, ordinary creditors are not able to be paid principal and interest in full, the claims in respect of this as former or present members (admitted or proved) are not in law deemed to be debts upon which statutory interest can be paid. In a solvent liquidation, generally all proved debts qualify for statutory interest and the deeming provisions of section 49(g) are not engaged.

The Grand Court provided clarity on a novel point of law for investors and insolvency practitioners alike, with respect to the entitlement of former investors, with claims for unpaid redemption proceeds in a solvent winding up of a Cayman Islands Investment fund, to receive statutory interest on such claims. A fundamental goal of the insolvency code was to reduce the costs of the liquidation process and to maximize returns to stakeholders.

Restructuring & Schemes

As in previous years, the courts have managed various restructurings and schemes of arrangement. In the matter of Seadrill Limited et al was a case where there were parallel restructuring proceedings for three Bermuda companies involving Bermuda provisional liquidation and Chapter 11 Proceedings in the US. On the application of the provisional liquidators, supported by the companies and a substantial creditor, the Court granted a permanent stay and an order recognising the confirmation order which the US Court was expected to make. This permanently restrained creditors and shareholders from pursuing claims against the companies in breach of their obligations under the proposed Chapter 11 Plan. The court distinguished the situation before it from the position in Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings plc, noting that the minority shareholders of Seadrill, who were opposing the recognition order, had submitted to the jurisdiction of the US Court. Additionally, the ancillary liquidation proceedings were commenced expressly to support and implement an anticipated Chapter 11 Plan. The minority shareholders elected not to appear at the first hearing of the petition, to argue that the joint provisional liquidators should take a different course from the outset. On these grounds, the court found it had sufficient jurisdictional competence to conditionally recognise the Chapter 11 Plan.

In Jersey, in the case of LXB Retail Properties PLC, the Royal Court considered whether a proposed scheme of arrangement satisfied the requirements of Articles 125 and 127 of the Jersey company law statute, which spell out the meaning of an arrangement and reconstruction respectively. The company was a listed closed-ended investment fund, which aimed to create a long lease retail investment portfolio of out of town sites. The fund had assets and liabilities that extended well beyond its intended term. Accordingly, a scheme was proposed whereby certain assets and associated long term liabilities would be transferred to a separate company, enabling the remaining clean assets to be realised and returned to shareholders, prior to the dissolution of the company.

The court held that the term ‘arrangement’ was to be broadly construed and should include any scheme where there was ‘give and take’ in altering the rights between the company and its shareholders. Turning to Article 127, this provides a court with the power to dissolve the company without winding it up and this was a necessary element of the proposed scheme. The court found that ‘reconstruction’ had a commercial rather than legal meaning and that it required the continuance of the company in some form. As part of the fund was to be transferred to another company, the court considered that the scheme was a reconstruction. Accordingly, the court found that it had the necessary powers to implement the scheme and ordered a meeting of the shareholders to vote on the same.

In Greater Europe Deep Value Fund II Limited, the Jersey Court considered the dissolution of a fund that had been wound up under Article 155 of the Jersey company law. Once the fund had been wound up, the liquidators applied to court for dissolution. Article 155 contains no express power for a court to dissolve a company wound up under it, nor is there any other provision of Jersey law containing such an express power. However, as dissolution is the logical end point of any winding up, the court interpreted Article 155 as including a power to order dissolution and ordered the dissolution on this basis. The court also observed that, even if Article 155 could not be interpreted in this way, the court had an inherent power to make the order sought on the basis of necessity.

Foreign Companies

In KMG International NV v. DP Holding SA, the BVI experienced the first reported example of an application being made to wind up a foreign company, pursuant to Section 163 of the Insolvency Act 2003. DP Holding applied for, and at first instance obtained, an order to set aside the permission that had been given to serve the application out of the jurisdiction, on the basis of a breach of full and frank disclosure and on the basis that Switzerland was the appropriate forum to deal with winding up proceedings. The Court of Appeal allowed the appeal against the order, setting aside the leave given to serve the winding up proceedings out of the jurisdiction, on the basis that the Judge failed to give sufficient weight to the fact that the assets of DP Holdings were in the BVI, or that Swiss winding up proceedings would be substantially delayed.


Appleby acted for the major creditors in Re Alpha Fund Ltd, the liquidators in Re Unicorn Worldwide Holdings Limited, the creditors in In the matter of Seadrill Limited et al, the applicant in Representation of Private Equity Fund Finance Limited and the petitioner in In the Matter of Harlequin Hotels and Resorts Ltd.

Key Contacts

John Wasty

Partner, Practice Group Head I Dispute Resolution: Bermuda

T +1 441 298 3232
E Email John

Mark Holligon

Managing Partner: Isle of Man

T +44 (0)1624 647 691
E Email Mark

Yahia Nazroo

Partner: Mauritius

T +230 203 4313
E Email Yahia

Andrew Willins

Partner: BVI

T +1 284 393 5323
E Email Andrew

Anthony Williams

Partner: Guernsey

T +44 (0)1481 755 622
E Email Anthony

Eliot Simpson

Partner: Hong Kong

T +852 2905 5765
E Email Eliot

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