Camulos decision confirms existing winding up process for Cayman hedge funds

The recent judgment of the Cayman Islands Court of Appeal in the case of Camulos Partners Offshore Limited has been widely reported as restricting the scope of the protection given to investors in Cayman-domiciled funds through ‘just and equitable’ winding-up.

If this were true it would be significant as it has long been recognised that given the absence in Cayman law of a minority shareholder right to petition for relief from unfair prejudice or oppression, the ability to petition for winding up on the just and equitable ground is one of the most important protections for shareholders in Cayman funds.

However, a careful reading of the judgment shows that far from restricting the scope of the remedy, the Court of Appeal confirmed the position which has long been established as a matter of Cayman Islands law.

The fund, Camulos Offshore Partners Limited, was a Cayman-domiciled feeder fund specialising in investments in undervalued and distressed assets.

The investor, Kathrein & Co, sought to redeem its shares in the fund with a notice dated July 31, 2008. The redemption date was September 30, 2008. On September 3, 2008 the fund made a restructuring proposal to all its shareholders. The investor did not accept that proposal and instead sought to enforce its right to redeem its shares. The fund suspended redemptions on November 12, 2008.

In April 2009 the investor started proceedings against the fund by issuing an originating summons seeking various declarations, including that the redemption price in respect of its shares was $27,227,268.80, and the fund must pay at least 15% of this in cash. 

In September 2009 following its discovery that the fund intended to make a cash payment to all other investors excluding the investor, the investor brought a petition for the winding-up of the fund on the ‘just and equitable’ ground. The petition alleged that the fund’s actions in paying the other investors and not paying the investor were unjust, inequitable and unfairly prejudicial to the investor and in breach of the directors’ fiduciary duty to act fairly between different classes of investor.

The petition sought an order winding up the fund or orders for alternative relief under section 95(3) of the Companies Law (2009 Revision). This gives the court hearing a just and equitable winding-up petition jurisdiction to grant as an alternative to a winding-up orders regulating the conduct of the company’s affairs, requiring the company to do or refrain from doing a certain act, authorising civil proceedings to be brought in the name of the company or for the purchase of the shares of any member by the other members or by the company itself.

The fund applied to strike out the petition. The application failed and the fund appealed. The orders which the court is empowered to grant under section 95(3) are broadly similar to those set out in section 461 of the English Companies Act 1985. This sets out the orders the court could make on an unfair prejudice petition brought under section 459 of the 1985 Act.

The first instance judge considered that the enactment of section 95(3) had broadened the scope of the just and equitable ground to include considerations of unfairness as under section 459 of the English 1985 Act.

The Court of Appeal rejected that interpretation and confirmed the gateway to the making of any alternative orders under section 95(3) was that the court should be satisfied it is just and equitable that the company be wound up. This does not mean it is impossible for allegations of unfair treatment, such as those set out in the petition, to provide grounds for winding-up. However, section 95(3) does not provide a freestanding remedy.

In giving this guidance the Court of Appeal was repeating observations it had made in its judgment in the Strategic Turnaround Master Partnership case in December 2008.

The Court of Appeal also confirmed that the court, when faced with an application to strike out a winding-up petition as an abuse of process, should apply a two-stage test: Is an alternative remedy available? Is the petitioner acting unreasonably in failing to pursue that alternative remedy?

If the answer to both these questions is ‘yes’, the court will hold it would not be just and equitable to wind up the company.

In this case there was an alternative remedy available to the investor, something the investor had recognised by starting its first set of proceedings. The court held that the investor’s objective in pursuing the petition was to put pressure on the fund to accede to its demands as ventilated in the existing proceedings. The investor’s conduct was not reasonable, its pursuit of the petition was an abuse of process and the petition was struck out. The court also ordered the investor to pay the fund’s costs on an indemnity basis.

The guidance given by the Court of Appeal rather than being a radical departure from previous practice simply confirms the guidance which it had given in Strategic Turnaround and which the Privy Council had given in CVC/Opportunity Equity Partners Limited v Demarco Almeida [2002] CILR 77.

The Court of Appeal and the Privy Council refused to strike out or restrain the petitions in those two cases precisely because there was no alternative remedy available to those petitioners. It has long been established and confirmed in both these cases, that a winding-up petition should not be brought in order to apply inappropriate pressure on the company if there were an alternative remedy available. In the Camulos case this was clearly what the investor was trying to do and so the Court of Appeal’s decision to strike out the petition should not have been a surprise.

As this case demonstrates Cayman law provides investors with a broad range of remedies. Investors can apply for relief in regular legal proceedings including actions for damages and actions for declaratory relief or, in appropriate circumstances, through collective proceedings by way of a winding-up petition.

Such a petition can be brought either on the ground of insolvency if standing can be established, for example as a contingent creditor, or on the just and equitable ground.

The relief available in a petition on the latter ground has recently been broadened by the enactment of section 95(3) of the Companies Law. In relation to just and equitable petitions based on a “loss of substratum”, which is a complaint often available to investors, the Cayman court has often taken a broader and more permissive interpretation than its English counterpart in order to assist petitioners. In these circumstances reports suggesting the Cayman jurisdiction in general and the Camulos judgment in particular are “investor unfriendly” are completely unwarranted.

This article was written by Jeremy Walton, a partner in the litigation and insolvency practice group and is global head of the fund disputes team, and Katie Brown, an Associate in the litigation and insolvency practice group, at Appleby in the Cayman Islands.