Don’t get wound up by wind up petitions

The recent Cayman Islands Court of Appeal decision in Camulos v. Kathrein & Co. helps clarify and narrow the potential scope of the new Cayman Islands’ oppression remedy section of the Companies Law (2009 Revision) (the Companies Law), section 95(3), which gives the Court jurisdiction to make certain orders in the alternative to a winding up order when a petition is presented by an investor. 
It also sends a clear message that winding up petitions should not be used to place improper or undue pressure on investment funds to accede to investor demands, writes Fraser Hughes, associate, Conyers Dill & Pearman.

Camulos Partners Offshore Limited is a Cayman Islands’ fund, while Kathrein & Co. is an investor in the fund.  On 31 July, 2008, the investor gave notice to redeem all of its shares in the fund, with the applicable redemption date of 30 September, 2008.  On 3 September, 2008 the fund sent a restructuring proposal to all of its investors. It provided that investors that did not consent to the proposal would receive 85 per cent of their redemption in specie and 15 per cent in cash. The investor did not accept the proposal.
On 12 November, 2008, the fund suspended redemptions and redemption payments. The investor brought an action on 22 April, 2009, seeking (among other things) a declaration as to the amount it was owed and that payment of 15 per cent of which must be in cash.
The investor then determined that the fund proposed to make a cash payment to all other investors in respect of the redemption of their shares, which it alleged was unjust and inequitable. As a result, the investor brought a petition to wind up the fund on the basis that it would be just and equitable to do so.
The Grand Court, at first instance, refused to make an order restraining the investor from commencing winding up proceedings.
The decision was appealed to the Court of Appeal on the issue of whether the petition should be struck. The Court of Appeal concluded that it should. The Court held that the investor’s winding up proceedings were unreasonable and an abuse of the Court’s process. The key questions in these circumstances are (1) whether there is an alternate remedy available to the petitioner; and (2) whether the petitioner is acting unreasonably in not pursuing that alternative remedy. 
In this case, the investor plainly had remedies other than the winding up of the fund – by bringing ordinary civil proceedings – and the court found that the investor was acting unreasonably in not pursuing those. 
The Court of Appeal also clarified that section 95(3) of the Companies Law does not provide stand alone, alternative causes of action or remedies. It is likely that an application for relief under section 95(3) must be done by petition to wind up a company, but seeking section 95(3) relief as an alternative. Put another way, winding up must be requested even though it might not be sought.  It is equally clear that relief under section 95(3) ought not to be pursued if there is an alternate remedy. It is not an alternative to bringing an action.

Accordingly, the message is clear, that investors must act reasonably and consider carefully any decision to issue winding up proceedings against a fund if, in the alternative, it is in a position to bring a more traditional civil action against the fund, since the costs and the consequences of doing so could be particularly harsh.