Voluntary Liquidation: The Right Way to Investigate an Alleged Wrong
20 Sep 2017
In a decision that will reassure investors in Cayman Islands investment funds and other vehicles, the Grand Court has shown its willingness to facilitate the investigation of legitimate concerns raised during a voluntary liquidation.1
The decision is the first written ruling on the Court's power to defer the dissolution of a Cayman Islands company in voluntary liquidation under section 151(3) of the Companies Law and also considers the Court's power to bring a voluntary liquidation under the Court's supervision in the context of an investigation into possible wrongdoing.
Cayman Islands Voluntary Liquidations
Cayman Islands funds frequently have their existence brought to an end through voluntary liquidation. Where the vehicle is solvent, a voluntary liquidator, who may be either an affiliated party or an independent professional, is appointed to wind up its affairs, ensure all creditors are paid and the remaining surplus is distributed to investors. Where the vehicle's affairs are in order before entering voluntary liquidation, the process is generally straightforward and does not require any court involvement. In the context of corporate funds, it is common for participating shares to be redeemed and final distributions to investors made before the company is placed into voluntary liquidation. Nevertheless, a stakeholder or the voluntary liquidator may seek the Court's assistance in certain circumstances, including by applying to have the liquidation continue under the Court's supervision where that would facilitate a more effective, economic or expeditious liquidation.2
The case concerned the voluntary liquidation of two investment funds (the "Funds") and their investment managers (the "Managers"), each of which was a Cayman Islands company. For many months prior to the commencement of the liquidations, the sole investor in the Funds had been seeking information concerning the Funds from the Managers. The investor's shares were compulsorily redeemed and the Funds and the Managers were then placed into voluntary liquidation and progressed through liquidation within a very short time. The voluntary liquidator filed his final returns with the Registrar of Companies, three months after which the companies would be deemed to be dissolved, meaning they would cease to exist and could not later be brought back into existence (which in turn would make investigating their affairs and pursuing any claims that might exist difficult or impossible). During that three month period, the investor learned of the liquidations and wished to prevent the companies being dissolved before there had been a full and independent investigation into certain payments allegedly made by the Managers. The investor applied to the Court for orders deferring the dissolution dates of all four companies and bringing the liquidations of the Funds under the Court's supervision, appointing qualified insolvency practitioners (specifically, partners of Deloitte & Touche) as its official liquidators.3
Deferral of the Scheduled Dissolution Dates
As a threshold question, the Court had to consider whether the investor had standing to bring the deferral applications, notwithstanding the compulsory redemption of its shares in the Funds and the payment of the redemption proceeds to the investor based on the net asset value of the shares as determined by the Managers. This required the Court to determine whether the investor was a "person who appears to the Court to be interested" within the meaning of section 151(3) of the Companies Law. In the absence of Cayman Islands authority, the Court referred to English decisions which had given that phrase a broad interpretation.4 As any recoveries in respect of the alleged payments made by the Managers would ultimately flow to the investor as the sole economic stakeholder in the Funds, the Court found that the investor had a sufficient interest in the deferrals to be regarded as an interested person.
The Court then went on to consider whether to grant the deferrals, referring to two Hong Kong decisions based on similar legislation.5 The factors that persuaded the Court that deferring the dissolutions was appropriate included that: (i) there were aspects of the Funds' businesses that had not yet been fully wound up; (ii) the deferrals would enable the investigation and possible pursuit of claims in respect of the alleged payments; and (iii) it was in the public interest that any past wrongdoing be investigated and, if appropriate, action taken.
Court Supervision of Voluntary Liquidations of the Funds
The investor argued that court supervision would result in more effective liquidations because official liquidators appointed by the Court would be able to utilise the compulsory powers in the Companies Law to obtain documents and property belonging to the Funds, they would be able to obtain recognition in other jurisdictions if necessary to pursue the investigation and the proposed appointees were wholly independent and had the necessary skills and experience to conduct a forensic investigation of the sort that was required.
The voluntary liquidator opposed the supervision applications on the grounds that the investor was neither a shareholder nor a creditor of the Funds, which are the only classes of persons (together with the voluntary liquidator) who can bring such an application under the Companies Law. The voluntary liquidator argued that the investor could not be regarded as a creditor of the Funds because any potential recoveries in respect of the alleged payments were simply too uncertain on the evidence before the Court.
The Court disagreed, finding that the investor had provided sufficient evidence to establish that it was a contingent creditor of the Funds and the Court considered that a contingent creditor does have standing to make an application for court supervision of a voluntary liquidation.
Voluntary liquidation can be a swift and efficient process to wind down Cayman Islands vehicles that are no longer carrying on business. However, where legitimate concerns are raised by stakeholders during the liquidation as to matters that require investigation, voluntary liquidation cannot be relied upon as a way to shut out those concerns. The Court has the appropriate tools and in the right circumstances will assist stakeholders in ensuring that such an investigation takes place.
For further information, please liaise with your usual Maples and Calder contact or one of the above contacts.
1 See In re Exten Investment Fund (Unreported, Grand Court, 23 June 2017). Maples and Calder acted for the successful petitioning investor.
2 Section 131(b) of the Companies Law. Amongst other things, court supervision results in independent professional insolvency practitioners being appointed to conduct the liquidation.
3 The investor accepted that it did not have standing to apply for court supervision in respect of the Managers and that any such application would fall to be made by the official liquidators of the Funds once appointed.
4 Re Test Holdings (Clifton) Ltd: Re General Issue and Investment Co Ltd  3 All ER 517; Re Wood and Martin (Bricklaying Contractors) Ltd  1 All ER 732.
5 The Commission of Inland Revenue v Fullbright Co. Ltd HCCW 208/2008; Kelso Enterprises Limited v Liu Yiu Keung CACV 303/2006.
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