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Industry Updates

Court of Appeal Guidance on Just and Equitable Winding Up Petitions

01 Jul 2015

The recent judgment of the Cayman Islands Court of Appeal ("CICA") in Asia Pacific Limited v ARC Capital LLC 1 explains the approach that the Court will take when considering an application to strike-out a contributory's just and equitable winding up petition which is based on an offer to purchase the petitioner's shares at fair value. 

The decision also confirms the principles that the Court will apply when awarding indemnity costs where it is argued that a party has conducted proceedings improperly, unreasonably or negligently.  


Trikona Advisors Ltd ("Trikona") was a Cayman Islands company which acted as investment advisor to an investment fund, Trinity Capital Plc.  

Both the ultimate beneficial ownership and management of Trikona were split 50/50 between two individuals, or members of their families, Aashish Kalra and Rakshitt Chugh.  Mr Kalra and Mr Chugh were both directors of Trikona and each had nominated one further director to the board.  However the Court found that Trikona's affairs were managed solely by Mr Kalra and Mr Chugh and that the other two directors took no part in the company's management. 

In the proceedings before the Grand Court, it was common ground that Trikona should be regarded as what is known as a "quasi-partnership" company.2  The Privy Council has described quasi-partnership companies as "[c]ompanies where the parties possess rights, expectations and obligations which are not submerged in the company structure".3  The Court went on to note that a feature of such companies is that "the legal, corporate and employment relationships do not tell the whole story… behind them there is a relationship of trust and confidence similar to that obtaining between partners, which makes it unjust or inequitable for the majority to insist on its strict legal rights."  

In 2008 and 2009 a number of disputes arose, and the Judge found that by the end of 2009, the relationship between Mr Kalra and Mr Chugh had broken down.  In December 2011 one of the registered shareholders through which Mr Kalra held his beneficial interest in Trikona ("Asia Pacific") commenced proceedings in Connecticut against Mr Chugh alleging breaches of fiduciary duty.  Asia Pacific alleged that Mr Chugh had sabotaged Trikona and had stolen assets from the company and it sought damages of US$210 million. 

Shortly after the commencement of the Connecticut proceedings, the director of Trikona nominated by Mr Chugh resigned and Mr Kalra and the director that he had nominated then signed a written resolution removing Mr Chugh as a director. 

In February 2012, the two registered shareholders through which Mr Chugh held his beneficial interest in Trikona (the "Petitioners") commenced winding up proceedings in respect of Trikona in the Cayman Islands pursuant to the Court's just and equitable winding up jurisdiction, relying principally on Mr Chugh's removal as a director.  The Petitioners argued that, as Trikona was a quasi-partnership, there was a legitimate expectation that Mr Chugh would participate in its management and that there had been a breakdown in trust and confidence between the parties. 

After the commencement of the winding up proceedings, Asia Pacific made an offer to purchase the Petitioners' shares in Trikona and applied to have the winding up petition struck-out as an abuse of process.  Pursuant to section 95(3) of the Cayman Islands Companies Law, on hearing a contributory's winding up petition on just and equitable grounds, the Court has jurisdiction to grant the petitioner certain relief as an alternative to a winding up order.  This includes an order that the petitioner's shares be purchased by another shareholder.  

The mechanism for determining the fair value of the shares in the offer from Asia Pacific purported to comply with the principles approved by the House of Lords in O'Neill v Phillips.4  However both the Grand Court and the CICA found, for slightly different reasons, that the offer did not comply with the principles set down in that case and in the CVC case referred to in footnote 3 above.  

After dismissing the strike-out application, the Grand Court proceeded to hear the trial of the petition and made a winding up order against Trikona.  The Judge made strong adverse findings against Mr Kalra, including that he was a wholly unreliable witness and that the allegations made by Asia Pacific in the Connecticut proceedings were "a thoroughly dishonest abuse of process".  The Grand Court ordered that Asia Pacific pay the Petitioners' costs of the proceedings on the indemnity basis. 


There were three grounds of appeal pursued by Asia Pacific, each of which was dismissed by the CICA.  Two of the grounds turned on the application of orthodox principles relating to the very limited scope for the CICA to overturn the trial Judge's findings of fact, where the findings are based on the Judge's assessment of the witnesses' oral evidence given at the trial. 

The more noteworthy part of the judgment concerns Asia Pacific's argument that the Judge had erred in failing to dismiss the petition on the basis that its buy-out offer provided the Petitioners with an adequate alternative remedy which they were acting unreasonably in not pursuing. 

The CICA began its discussion of this issue by noting that, when making a buy-out order under section 95(3) of the Companies Law, the Court does not dismiss the winding up petition, it allows the petition.  The gateway to the granting of alternative relief (i.e. the buy-out order) pursuant to section 95(3) is that the Court is satisfied that the petitioner has made out a case for a winding up order. 

The CICA went on to hold that the Judge was wrong to apply the analysis set out in Camulos Partners Offshore Limited v Kathrein and Company 5 in a "buy-out offer" case.  In Camulos, the Court struck-out a winding up petition on the grounds that the petitioner had an adequate alternative remedy, in the form of an ordinary writ action by which it could obtain the relief that it wanted (namely payment of its redemption claim and orders restraining payments to other investors but not to it) and the petitioner was trying to exert improper pressure on the company by pursuing winding up proceedings to procure leverage.  The reasoning in Camulos does not apply to the petition in the Asia Pacific case because, where a petitioner's objective is to obtain a winding up order or a buy-out order under section 95(3), the winding up petition is the appropriate route. 

The CICA recognised that a petitioner which rejects a buy-out offer at fair value for its shares should normally expect to have its petition dismissed.  However that is not because of the existence of an alternative remedy, but because if, at the stage of an application to strike-out the petition before trial, the Court is satisfied that the likely outcome of the petition will be that the Court will allow the petition and will determine that the order most favourable to the petitioner will be a buy-out order on the terms already offered to the petitioner, the continued pursuit of the petition will be an abuse of process. 

The CICA went on to state that, in a quasi-partnership case (at least where the petitioner is a 50% shareholder), it is not necessarily unreasonable for the petitioner to refuse a buy-out offer: 

"Why should [a 50% shareholder] not take the view that an equitable solution to the breakdown in the relationship of trust and confidence upon which the quasi partnership was established would be for him to have the opportunity to purchase the other party's 50% share; or for the company should be sold to a third party; or for the company to be wound up?  And why should he not take the view that, if agreement cannot be reached as to an equitable solution, he would prefer to await the judgment of the court after a trial rather than to be forced to agree to a solution which he sees as inequitable?

In dismissing the appeal against the indemnity costs order, the CICA approved the approach followed by the Grand Court in Al Sadik v Investcorp Bank BSC. In determining whether a party had conducted proceedings "improperly, unreasonably or negligently"7,so as to justify an order for indemnity costs, a distinction has to be drawn between a party who advances an honest case, but who fails because the Court finds their evidence to be incredible or untruthful, and a party who advances a case which they know to be false.  Only in the latter case can the Court make an order for indemnity costs. 

The CICA cautioned against acceding too readily to a strike-out application in these circumstances.  Striking out a winding up petition without hearing all the evidence, simply because of the existence of an offer to buy the petitioner's shares risked pre-judging the substantive issues: 

"It may be that, in the light of the analysis contained in the judgment of this Court as to the proper approach to an application to strike out a contributory's winding up petition in circumstances where the petitioner is a 50% shareholder, future strike out applications in such cases will be regarded as made unreasonably…". 

It remains to be seen how the courts will interpret and apply these comments, and the comments referred to above that a 50% shareholder is not necessarily acting unreasonably in refusing a buy-out offer, in future cases.  In particular, it remains to be seen whether the approach in this case is followed in all just and equitable winding up proceedings where the company in question is a quasi-partnership, or whether it will be confined to situations where the company is a quasi-partnership and the petitioner is a 50% shareholder.  

1 Unreported, CICA, 22 April 2015.

2 Although there was a dispute in the Grand Court proceedings as to the identity of the parties to the quasi-partnership. In the appeal proceedings, the Appellant unsuccessfully sought to change its position to argue that the Judge was wrong to find that Trikona was a quasi-partnership between Mr Kalra and Mr Chugh. 

3 CVC/Opportunity Equity Partners Ltd v Demarco Almedia [2002] CILR 77 at [34] per Lord Millett.

4 [1999] 1 WLR 1092. 

5 [2010] 1 CILR 303. 

6 [2012] (2) CILR 33.

7 Within the meaning of Order 62, Rule 4(11) of the Grand Court Rules.

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