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
14 May 2024

A New 'Star' is Born

Appleby involved in first of its kind application brought by an Enforcer of a STAR Trust in the Gran...

3 May 2024

Funds - How to Comply with Cayman's New Corporate Governance Rules

The Cayman Islands Monetary Authority (CIMA) issued rules on corporate governance and internal contr...

29 Apr 2024

Cayman Islands Grand Court Orders Disclosure Despite PRC Data Security Law Concerns

The Cayman Islands Grand Court has recently ordered disclosure of documents in on-going court procee...

24 Apr 2024

Restructuring Provisional Liquidators May Not Be Dead After All

In the Cayman Islands restructuring provisional liquidators may not be dead after all. In Re Kingke...

9 Apr 2024

Chief Justice affirms Cayman’s availability for the enforcement of foreign arbitral awards

Chief Justice affirms Cayman’s availability for the enforcement of foreign arbitral awards

8 Apr 2024

Whose crypto is it anyway? – the status of cryptocurrency as ‘property’ under BVI and Cayman law

In recent years, a number of courts have grappled with the question of whether cryptocurrency is “...

8 Apr 2024

Electronic dissemination of corporate communications by Hong Kong listed issuers from an offshore perspective

In June 2023, The Stock Exchange of Hong Kong Limited published consultation conclusions to its cons...