Grand Court Refuses to Stay Winding Up Petition in Favour of Arbitration
12 Sep 2013
A recent decision of the Grand Court of the Cayman Islands 1 has considered the circumstances in which it may be appropriate to stay or strike out a winding up petition brought in alleged breach of an arbitration agreement. In so doing, the Court reviewed and applied the English Court of Appeal decision in Fulham Football Club (1987) Ltd v Richards  Ch 333 in the context of a Cayman Islands exempted limited partnership. The decision is a welcome clarification of the circumstances in which a winding up petition may still be filed and determined notwithstanding an arbitration agreement contained in the constitutional documents of a fund.
Cybernaut Growth Fund, L.P. (the "Partnership") was registered as an exempted limited partnership in the Cayman Islands and was the subject of a winding up petition filed by a related group of limited partners representing 49.96% of limited partnership interests (the "Petitioners") on the just and equitable ground. The general partner and the only other limited partner (the "Respondents") both issued applications to stay or strike out the petition, advancing effectively two grounds in support of the applications:
(a) That the Petitioners had contracted out of their statutory right to present a winding up petition; and
(b) That the dispute was subject to an arbitration agreement which the Petitioners had breached by filing the petition and arbitration represented an appropriate alternative remedy which the Petitioners were unreasonably not pursuing.
Contracting out of a statutory right to present a winding up petition
The Respondents argued that the relevant provisions of the limited partnership agreement ("LPA") which set out the mechanism for winding up by the general partner meant that the Petitioners had no right to petition the Court for a winding up order. The Court held, as a matter of construction, that the provisions of the LPA dealing with liquidation only concerned the general partner acting as voluntary liquidator in the specified circumstances. The relevant clause commenced with the words "subject as provided in the Partnership Law" which was a reference to the Exempted Limited Partnership Law. The Exempted Limited Partnership Law itself contains a mechanism for the petition by limited partners for the compulsory winding up of an exempted limited partnership (by reference to the Companies Law) which was entirely distinct from a voluntary winding up performed under the (usual) provisions of the LPA. The Court applied the earlier Court of Appeal decision in TNT v Logispring GP LP  CILR 456 where it was held that a provision in an LPA which purported only to allow creditors (being silent as to limited partners) to apply to Court to replace the general partner as liquidator did not operate so as to exclude a limited partner's right to apply to replace the general partner under section 7(5) of the Exempted Limited Partnership Law.2 Any purported contracting out of a limited partner's statutory rights to seek a winding up order would have to be drawn in clear terms.3
The Respondents sought a stay based on section 4 of the Foreign Arbitral Awards Enforcement Law (1997 Revision). Section 4 gives the Grand Court the power to stay the proceedings where the relevant matters were referable to arbitration "… unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred".
The Respondents submitted that the matters pleaded in the petition which were alleged to have given rise to a justifiable loss of trust and confidence by the Petitioners (making it just and equitable to wind up the Partnership), including breaches of the LPA, were all capable of being determined by way of arbitration.
The issue before the Court required consideration of obiter comments made by Patten LJ in the English Court of Appeal decision in Fulham Football Club (1986) Ltd v Richards  Ch 333. That case is authority for the proposition that an arbitral tribunal does not have jurisdiction to make a winding up order. However, Patten LJ's obiter comments gave rise to the question of whether or not an arbitral tribunal could properly decide matters which might themselves form the basis for a winding up order, but without going so far as to make a winding up order. The relevant passage from Patten LJ's speech in Fulham is quoted by the Grand Court in its judgment as follows:4
"I have already set out my own reasons for preferring the view that disputes of this kind which do not involve the making of any winding up order are capable of being arbitrated. Although not necessary for the resolution of this appeal, I also take the view, as Austin J did in the ACD Tridon case, that the same probably goes for a similar dispute which is used to ground a petition under section 122(I)(g) to wind up the company on just and equitable grounds. In those cases the arbitration agreement would operate as an agreement not to present a winding up petition unless and until the underlying dispute had been determined in the arbitration. The agreement could not arrogate to the arbitrator the question of whether a winding up order should be made. That would remain a matter for the court in any subsequent proceedings. But the arbitrator could, I think legitimately, decide whether the complaint of unfair prejudice was made out and whether it would be appropriate for winding up proceedings to take place or whether the complainant should be limited to some lesser remedy. It would only be in circumstances where the arbitrator concluded that winding up proceedings would be justified that a shareholder would then be entitled to present a petition under section 122(I)(g). In these circumstances the court could be invited to lift any stay imposed on proceedings imposed under section 9(4). In much the same way, it would, I think, be open to an arbitrator who considered that the proper solution to a dispute between a shareholder and the company was to give directions for the conduct of the company's affairs to authorise the shareholder to seek such relief from the court under section 994. But such cases are likely to be rare in practice…"
Jones J interpreted these comments in the following way:
"As a matter of principle, I think that this type of dispute [i.e. that pleaded in the petition] is non-arbitral for two inter-related reasons. Firstly, a winding up order (whether relating to a company or an exempted limited partnership) is an order in rem which is capable of affecting third parties. Because the source of an arbitral tribunal's power is contractual, its scope is necessarily limited to making orders which will be binding only upon the contracting parties. Secondly, any dispute about who should be appointed as liquidator of a company or exempted limited partnership is a matter involving the public interest, especially if it is carrying on a regulated business. … I regard winding up orders, supervision orders and orders for the appointment/removal of liquidators as class remedies, which in turn leads me to the conclusion that such proceedings fall within the exclusive jurisdiction of the Court".
The Court sought to explain the comments made by Patten LJ as having practical application in two distinct circumstances. The first was where a winding up petition includes matters which constituted a discrete inter partes claim falling within the scope of the arbitration agreement. Although not expressly referred to in the judgment, the Court must have had in mind circumstances where in truth inter partes litigation is being dressed up in the form of a winding up petition.5 The second was where the petition includes matters which could properly be tried as preliminary issues, which could then be determined by an arbitrator rather than the Court. The Learned Judge distinguished the matters pleaded in the petition in the case at hand by noting that the only relief sought by the Petitioners was a winding up order and the appointment of an independent liquidator, orders which could only be made by the Court. It was noted that the petitioners were not seeking to claim damages for breach of contract or an injunction to restrain future breaches, only the collective remedy of winding up. Jones J held that "[i]t is not open to me to delegate the trial of a petition to an arbitral tribunal on the basis that I will then decide whether to make a winding up order in the light of the arbitrators' findings and recommendations". Accordingly, the Learned Judge considered the matters to be determined in the petition to be non-arbitrable, and refused to grant a stay.
The Grand Court's ruling is a welcome clarification of the principles applicable to winding up proceedings in the Cayman Islands when there is an arbitration agreement in the constitutional documents of the entity the subject of the petition. It has always been the position that where a winding up petition is considered an abuse of process, including where the matters to be determined are properly determined by way of normal inter-partes litigation (including by way of arbitration), it will be liable to be struck out. However, where (for example) there are credible allegations of numerous, serious breaches of contractual and statutory duties which are said to give rise to a justifiable loss of trust and confidence in the general partner by the petitioner, the Grand Court has confirmed that limited partners will not be forced to successfully arbitrate such matters before filing a winding up petition.
2 The Court of Appeal not being inclined to adopt the maxim expressio unius est exclusio alterius.
3 Neither the Court of Appeal in TNT nor the Grand Court in the case at hand needed to go on to consider the further question of whether, as pure legal matter, it is even permissible for a limited partner to contract out of its right to seek a winding up order from the Court. That issue is subject to considerable uncertainty until clarified by the courts.
4 The internal footnotes to this quotation from Jones J's decision are omitted.
5 An example being Camulos Partners Offshore Limited v Kathrein  1 CILR 303 where in truth the remedy sought by the petitioner was the payment of the redemption sum, hence it being held to be inappropriate and abusive to file a winding up petition when the issue was capable of being litigated in the usual way.
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