In the recent decision of Re China Shanshui Cement Group Ltd., the Grand Court of the Cayman Islands considered the meaning of section 94(1)(a) of the Companies Law (2013 Revision) (the Law), which deals with the authority of the directors of a Cayman Islands company to present a petition for the winding up of the company.
Mangatal J. departed from an earlier decision of the same court by finding that directors have no such authority – even where the company is insolvent – unless either (a) they have obtained approval of the shareholders by ordinary resolution; or (b) the company, if incorporated after March 1 2009, has Articles of Association that contain an express provision authorizing the directors to present a petition.
The directors of a Hong Kong-listed company had proceeded to file their petition without first seeking the approval of the company’s shareholders, which they knew could not be obtained in light of opposition from the company’s two largest members.
They had also filed an application for the appointment of provisional liquidators, which they said was sufficiently urgent as to require an ex parte hearing the next day. Nothing in that was considered particularly unusual, taking into account the fact that a director’s duties in an insolvent situation include safeguarding the assets of the company for the benefit of its creditors.
The company’s two largest shareholders, who together own over 53 percent of the company’s issued shares, learned of the hearing through a mandatory announcement on the Hong Kong Stock Exchange and successfully applied to adjourn the ex parte hearing to give other interested parties an opportunity to find out about, and be heard on, the application to appoint provisional liquidators. At the adjourned hearing a week later, the majority shareholders questioned the directors’ standing to present the petition and to seek the appointment of provisional liquidators.
The argument that followed took two days to complete and raised difficult questions of statutory construction and public policy, ultimately resulting in the somewhat unusual step of contradicting a finding of another first-instance judge of the Grand Court, which had been followed by local practitioners for the last four years.
The law plainly provides that a company may petition for its own winding up, but the issue of whether the authority to do so is automatically delegated to the company’s board of directors had also been a vexing issue for many years in England, where for some time the case of Re Emmadart Ltd. had required shareholder authority for such actions until an amendment to the law eventually changed the position. When a new-look Companies Law was introduced in the Cayman Islands in 2008, section 94(2) of the Law provided some welcome clarification by providing that:
“where expressly provided for in the articles of association … the directors of a company incorporated after the commencement of this Law have the authority to present a winding up petition on its behalf without the sanction of a resolution passed at a general meeting.”
However, for the many Cayman Islands companies incorporated prior to March 1 2009 (when the law came into force), the drafting did nothing to improve the situation until it was decided by Jones J. in Re China Milk Products Group Ltd. that the same principle extended to insolvent companies – or companies of doubtful solvency – incorporated before that date. Jones J. said in that case that the temporal limitation contained in section 94(2) of the law only applied to solvent companies.
The rationale was clear and uncontroversial: that directors of insolvent companies in a creditor-friendly jurisdiction like Cayman should be permitted to take action in the interests of creditors without being held to ransom by shareholders whose interests in an insolvent scenario are not their primary concern. But that interpretation of the law, albeit popular, would prove to be strained and destined not to stand the test of time.
Mangatal J. was invited to consider the evolution of section 94 of the law and the statutory provisions in England from which it had derived. She was also taken to the decision of Smellie J. (as he then was) in the Banco Economico SA v Allied Leasing and Finance Corp., in which he had extended the Emmadart principles to the Cayman Islands. In her ruling she held:
“A materially similar section was in place in Banco Economico when it was decided that Emmadart applied in the Cayman Islands. It is therefore in my judgment hard to see why the common law position, being the rule in Emmadart, would not continue to apply to the materially similarly worded section.”
She went on to say that while Jones J.’s construction of section 94 may have been a commercial one, she felt unable to endorse it in circumstances where the drafting was not so ambiguous as to warrant such a liberal reading.
It must be said that her reasoning was sound, but the question now arises what can or should the legislature do to plug the gap that her judgment has left? The recognized approach to conflicting first-instance decisions is to follow the more recent of the two, and we would expect to see Mangatal J.’s decision followed with the result that the law in this area is likely to become the subject of increased scrutiny throughout the industry.
Although the decision will not affect companies incorporated after March 2009, the boards of older companies could now find themselves in an unwanted battle with shareholders to make decisions which they consider it their duty to make, such as appointing provisional liquidators to put forward a restructuring plan.
It is to be hoped that the legislature can take this opportunity to introduce clearer and more effective provisions into the law to provide assistance to directors in having regard to the interests of creditors – and acting, where appropriate, without the blessing of their shareholders. It has always been one of the Cayman financial services industry’s greatest strengths that it can react where necessary to issues of public policy and legal certainty and in so doing provide comfort to office holders and stakeholders alike.
Marc Kish is a partner and Paul Madden is a senior associate at Harneys. Marc Kish, James Noble, Paul Madden and Chai Ridgers of Harneys’ Litigation and Insolvency practice advised China Shanshui Investment Company Ltd., one of the successful opposing shareholders.