In such a case, once the fraud has been discovered, it is unlikely to be very long before the company is put into liquidation.  But the issue for shareholders who were led to invest in the company on that basis has been whether, once it is put into liquidation, they continue to have a viable claim against it for misrepresentation.

That issue had remained undecided in the Cayman Islands until the recent decision of the Grand Court in Re HQP Corporation Ltd (in Official Liquidation) [1].  In that case, Doyle J was required to decide whether the “Rule in Houldsworth” – laid down by the English House of Lords almost 150 years ago in Houldsworth v City of Glasgow Bank [2], to the effect that a shareholder could not sue the company on such a claim once the winding up order had been made – should be applied in the Cayman Islands.

Although the Cayman courts have long-recognised that English common law was received into these Islands no later than 1865, such that Houldsworth cannot possibly have formed part of Cayman Islands common law, it is nonetheless common for English decisions since 1865, particularly at an appellate level, to be treated as persuasive and be followed by the Cayman courts, at least where there are no clear reasons to do otherwise.  Doyle J thus considered in detail the judicial and academic treatment which the Rule in Houldsworth has received over time in England and various Commonwealth jurisdictions.

Doyle J observed inter alia that the Rule in Houldsworth has been overridden by statute in the UK, other courts across the Commonwealth have declined to follow it, and it has attracted criticism from various quarters.  Moreover, the Judge considered that to apply the Rule in Houldsworth would be to introduce an inappropriate restriction on the breadth of section 139(1) of the Companies Act, which prescribes what debts will be admissible to proof against the company in liquidation.  He thus firmly declined to do so.

The secondary issue which the Court then had to decide was how such claims would rank in the liquidation, and Doyle J concluded that they would rank as unsecured debts of the company.

Re HQP thus represents a very significant development under Cayman Islands law for unredeemed investor shareholders who have been the victims of a fraud.  It immediately brings to mind Ponzi scheme cases (e.g. DD Growth Premium 2x Fund [3] and Weavering Macro Fixed Income Fund [4]), which inherently involve balance sheet insolvency – since, although an unredeemed investor will have no interest in such a liquidation as shareholder, it may well be able to articulate a sound misrepresentation claim, in which case its failure to redeem before the liquidation commenced will not necessarily mean it is left behind to bear the full brunt of the fraud (a position that some forcefully argue is inequitable).  It may instead be entitled to share in any distribution from the liquidation as an unsecured creditor in respect of that claim.

Liquidators and shareholders who require detailed advice on the implications of Re HQP and misrepresentation claims in this context are encouraged to contact the authors to discuss how the Appleby Dispute Resolution team can help.


[1] (unrep. 7 July 2023).

[2] (1880) 5 App Cas. 317.

[3] Appleby acted for the liquidators of the Fund in [2014] 2 CILR 316 (GC); [2015] 2 CILR 141 (CICA); [2017] 2 CILR 739 (PC).

[4] Appleby acted for numerous custodians in their defence of voidable preference claims pursued by the Weavering liquidators.

Twitter LinkedIn Email Save as PDF
More Publications
16 Aug 2023

Bondholder Litigation Under the Spotlight in the Offshore Jurisdictions

Can an ultimate beneficial owner of notes file a winding up petition against the issuer? In this ar...

2 Aug 2023

Reliance on the Merger Price in Cayman Appraisal Actions

Andrew Jackson, Damon Booth, Barry Isaacs KC and Toby Brown consider the use of the merger price to ...

25 Jul 2023

Loans & Secured Financing in the Cayman Islands 2023

A Q&A guide that provides a topical analysis of loans & secured financing in the Cayman Islands.

13 Jul 2023

Grand Court takes novel approach in crypto winding up proceedings brought by retail investors

On 7 July 2023, the Honourable Justice Kawaley issued a winding-up order in the Financial Services D...

18 May 2023

The 2023 Cayman Islands Real Estate Guide

The Real Estate 2023 guide provides the latest legal information on the impact of disruptive technol...

26 Apr 2023


Segregated portfolio companies (SPCs) are frequently used in Cayman Islands (re)insurance structures...

13 Feb 2023

Offshore AML Regulation and Enforcement in the Cayman Islands

In the February 2023 edition of Financier Worldwide, Miriam Smyth answers questions about AML Regula...

3 Feb 2023

Offshore Private Funds and Offshore Managers: Divergent Regimes in the Cayman Islands and the British Virgin Islands

Consideration should be given and appropriate advice should be sought as to what would be the most a...