Camulos decision confirms existing winding up process for Cayman hedge funds |
Date: Wednesday, June 16, 2010
Author: Hedge Funds Review
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.