In the Cayman Islands, like many other common law jurisdictions, claimants have various tools available to them to try to protect their position pending a final ruling. For example, the Cayman Islands Grand Court can issue a freezing injunction, appoint receivers and/or appoint provisional liquidators in the appropriate circumstances. One of the major points of emphasis from recent cases is that, due to the intrusive nature of each of these draconian remedies, there is a heavy burden on the applicant to show that the relief is necessary. Accordingly, in most cases, in order to convince the Grand Court that urgent intervention is essential, the applicant will need cogent evidence of a real risk of dissipation of assets or serious mismanagement.
The availability of these interim remedies is particularly relevant to creditors and contributories of large publicly listed companies, which use Cayman Islands companies as their listing vehicles. More than 50% of companies listed on the Hong Kong Stock Exchange are incorporated in the Cayman Islands. Cayman Islands entities are also commonly used by groups operating in Mainland China and listed on an exchange in the United States. In formulating litigation strategies to target or defend these listed companies, it is essential to accurately assess whether the evidence in a particular case would justify the imposition of the drastic measures that are available in the Cayman Islands.
By reference to two recent decisions of the Grand court, Conyers discusses the current position in the Cayman Islands in more detail.
Hudson Capital Solar Infrastructure v Sky Solar Holdings
Under section 11A of the Grand Court Act, it is possible to obtain injunctive relief in aid of proceedings which have been or are to be commenced in a foreign court, which are capable of giving rise to a judgment that may be enforced in the Cayman Islands.
That was the type of ancillary relief that Hudson Capital Solar Infrastructure sought in this case. Hudson had already initiated proceedings in New York for summary judgment in connection with an amount allegedly due under a guarantee given by Sky Solar Holdings. On an ex parte basis, in aid of the existing foreign proceedings, Hudson applied for a wide-ranging freezing order and the appointment of receivers over shares which were said to be at risk of imminent dissipation. Kawaley J decided to grant the relief following the ex parte hearing and, in light of the “considerable anxiety” he felt at the time, expressly allowed Sky Solar to return to court at very short notice to apply to have the order summarily discharged.
The principal purpose and effect of the injunction and receivership order was that Sky Solar would be prevented from carrying out an important merger and stopped from de-listing from the NASDAQ stock exchange. The judge made it clear that Hudson was seeking “unusually intrusive” and “virtually unprecedented” relief.
In his written reasons following the inter-partes hearing, at which he discharged the order in its entirety, Kawaley J summarised the position in the Cayman Islands as follows:
“Absent solid evidence of a risk of unjustified dissipation it will not generally be just and convenient to grant intrusive interim relief, such as a freezing order or (especially) the appointment of a receiver.”
The judge held that there was no such solid evidence and that, at the ex parte stage, there had not been a fair presentation given.
In general terms, an applicant seeking a freezing injunction in the Cayman Islands must establish that: it has a good arguable case; the judgment will be capable of being enforced in the Cayman Islands; there is a real risk that the defendant will dissipate assets and engage in activities outside of the ordinary course of its business; the applicant would not be protected adequately by an award of damages; unless the defendant is a Cayman company, there is a high probability of assets being located within the Cayman Islands; and on the balance of convenience, the injunction should be granted.
In order to satisfy the test for the more intrusive, more expensive and less reversible appointment of a receiver, the applicant must also demonstrate that the assets cannot be preserved by an injunction, such that there is an imminent peril of substantial irreparable damage; and it is just and convenient to appoint receivers.
As confirmed in Hudson v Sky Solar, in order to obtain a freezing injunction together with a receivership order in the Cayman Islands (whether in aid of domestic or foreign proceedings), an applicant will need very solid evidence to satisfy the threshold test. This should be treated as an exceptional remedy and is one of the more drastic interim solutions in the Grand Court’s arsenal.
In the Matter of Pacific Fertility Institutes Holding Company Limited
Section 104(1) of the Companies Act provides that the Court may, at any time after the presentation of a winding-up petition, but before the making of a winding up order, appoint a liquidator provisionally.
An application for the appointment of a provisional liquidator may be made on the grounds that: there is a prima facie case for making a winding-up order; and the appointment is necessary in order to prevent the dissipation or misuse of the company’s assets, the oppression of minority shareholders or mismanagement on the part of the company’s directors.
As Rimer LJ explained in Revenue and Customs Comrs v Rochdale Drinks Distributors Ltd, the mere fact that a winding-up order is likely to be made is not enough on its own to justify the appointment of a provisional liquidator. He noted that “something more is needed”.
In the matter of Orchid Developments Group Limited, concerning a creditor’s winding up petition and application to appoint provisional liquidators, Jones J confirmed that there are limited and very specific grounds upon which provisional winding up orders can be made in the Cayman Islands. However, it is worth noting that Segal J confirmed in his judgment in Re Asia Strategic Capital Fund that if there is any risk that, pending the hearing of the petition, records may be lost or destroyed, that may also found the basis for the appointment of a provisional liquidator, who will be able immediately to secure them and commence inquiries into the affairs of the relevant company.
In a decision of the Grand Court in CW Group Holdings Limited, Parker J referred to recent authorities regarding what constitutes mismanagement for the purposes of section 104(2) of the Companies Act. Parker J observed that there is a “heavy burden” on the applicant to demonstrate that the appointment of provisional liquidators is necessary in order to prevent dissipation and/or mismanagement by the directors.
Nevertheless, provisional liquidators were appointed in Pacific Institutes Holding Company Limited, despite an eleventh hour application for an adjournment. In that case, an adjournment application was made on the grounds that no proper notice had been given to the company and there was no urgent need for the application to be heard. Dismissing the adjournment application, Kawaley J found that the petitioner had established a prima facie case for winding up of the company on a just and equitable basis, and that there was “clearly a risk of dissipation of assets”.
Helpfully, Kawaley J observed that even in cases where there was not an opportunity for evidence to be contradicted by an opposing party, this will not prevent the immediate appointment of provisional liquidators. In the circumstances of this case, where one business partner suspected the other of serious misconduct, and this was “not merely a vacuous complaint”, Kawaley J considered it was appropriate to immediately appoint provisional liquidators.
Full and Frank Disclosure
Many urgent interim applications, such as those described above, will need to be made on short notice and on an ex parte basis. In those circumstances, the court is reliant on the applicant to comply with its duty of full and frank disclosure. The core principles behind the duty of full and frank disclosure are: balanced and accurate presentation – the applicant is required to make full and fair disclosure of facts which it is material for the court to know; duty not to usurp judicial function – it follows that whether or not a fact or matter is material is a matter to be determined by the court; duty to signpost difficulties in the applicant’s case: relevant points and competing considerations must be properly signposted in the main affidavit(s) and skeleton argument, mindful of the fact that it will be impossible for a judge to absorb all the nuances himself or herself without such signposting; duty to make proper inquiries – the applicant is required to make proper inquiries before making the application; and duty of both lawyers and client – the duty of disclosure is not confined to the applicant’s legal advisers but is a duty which rests upon the applicant itself; it is the duty of the legal team to ensure that the lay client is fully aware of the duty and ensures that the duty is discharged.
As held by Popplewell J in Fundo Soberano de Angola v Dos Santos , although the principle is expressed in terms of a duty of disclosure, “the ultimate touchstone is whether the presentation of the application is fair in all material respects … This is again the consequence of the exceptional derogation from the principle of hearing both sides”.
Sky Solar v Hudson is a recent example of the Grand Court citing failures of fair presentation in support of discharging an ex parte order. Kawaley J noted that a fair presentation would have required the applicant to draw his attention to and explain certain aspects of notes to consolidated financial statements and NASDAQ stock exchange announcements which were included in the large bundle of documents before the Court.
It is trite that each case will turn on its facts. However, it is clear that the Grand Court is mindful of the intrusive and potentially value-destructive nature of each of the interim remedies discussed above. Accordingly, applicants will be well-advised to ensure that the evidence they are putting forward justifies extreme intervention and that there is a legitimate need to put in place specific measures to hold the fort under the Court’s supervision. The Grand Court will often require an undertaking in damages or security for costs to protect the defendant, and applicants must be alive to their duties of frank disclosure and fair presentation.
This article was originally published in Commercial Dispute Resolution Magazine.