RECALL OF VOLUNTARY LIQUIDATION OF CAYMAN ISLANDS’ COMPANIES
Can the voluntary liquidation of a Cayman Islands company be halted, set aside or recalled? Yes!
This guide briefly sets out the basis on which the voluntary liquidation of Cayman Islands’ companies may be recalled or set aside and such companies restored to active status by an Order of the Grand Court of the Cayman Islands (the “Court”).
Introduction
Pursuant to s159 of the Companies Act (as amended) of the Cayman Islands (the Act), a company which has been struck off the register of companies may be restored if the Court is satisfied that the company was, at the time of the striking off, carrying on business or in operation, or otherwise, that it is just that the company be restored to the register. The application for restoration may be made to the Court at any time by the company, or any member, or creditor who feels aggrieved by the company having been struck off the register for up to a period not exceeding ten (10) years following a strike off. A reinstated company will be deemed under the Act to have continued in existence as if it had not been struck off the register of companies.
The Act provides that a liquidator or any other person who appears to the Court to be interested, may apply to the Court for an Order to defer the date at which the dissolution of a company following voluntary winding up is to take effect, to such date as the Court thinks fit. Accordingly, the life cycle of the voluntary winding up of a company may be extended before its dissolution, however, unlike struck off entities, there are no similar explicit post dissolution statutory provisions under the Act, or the Companies Winding Up Rules (as amended) of the Cayman Islands (the Rules), for companies which have been voluntarily dissolved to be restored to the register of companies.
Court’s Jurisdiction to Set Aside Dissolution of a Company after Winding Up
In the absence of express statutory provisions in the Act and the Rules, the Court has considered whether it has the jurisdiction to grant declaratory relief to set aside the dissolution of a company following winding up and has provided useful guidance that it possessed the inherent jurisdiction to do so. In the recent case of In the Matter of Porton Capital Inc. and Porton Capital Ltd, FSD 226/2021 (DDJ), Judgment dated 24 March 2022 (unreported) paragraph 15, Doyle J stated:
“It is common ground that this court has jurisdiction to restore a company to the register when it has been dissolved following a voluntary liquidation if an applicant for such relief can prove that there was a fraud in respect of the liquidation (Schramm and Hiscox Syndicate 33 v Financial Secretary 2004-05 CILR 39 Chief Justice Smellie applying Pinto Silver Mining Co. (1878) 8 Ch. D. 273 dicta of James LJ and Cotton LJ and London and Caledonian Marine Ins. Co. (1878) 11 Ch. D 140 dicta of James LJ and on appeal [2004- 05 CILR 104] considering Pinto, London & Caledonian and Russian & English Bank v Baring Brothers & Co Ltd [1936] A.C. 405). I therefore determine that this court has jurisdiction to grant the relief claimed if satisfied that a fraud in the liquidations has been proved.”
Doyle J dismissed the petition for an Order that the dissolution of certain companies be declared void on the basis of alleged fraud and that such companies be restored to the register and joint official liquidators be appointed, as the petitioner failed to prove fraud in that case. However, Doyle J stated that the Court must exercise such jurisdiction with great caution and noted on the one hand, the cases on the policy principle that “fraud unravels all” and on the other hand, the competing policy principles of certainty and finality.
Similar sentiments were articulated by Smellie CJ in Schramm and Hiscox Syndicate 33 v Financial Secretary [2004-05 CILR 39] in which Smellie CJ evinced a number of reasons why the jurisdiction to set aside a dissolution following a winding up should be narrowly construed. Smellie CJ disagreed with the earlier decision in Campillo v. Registrar of Companies, 2001 CILR 547, in which it was held that the presumption under the Act that a company was deemed to be dissolved was a rebuttable one, and that even if a company had been dissolved, it could be restored to the register of companies under the provision in the Act which conferred power on the Court to restore a company struck from the register. This was one of the main reasons why Smellie CJ did not follow the Campillo case and he noted that, if provisions in the Act were construed to confer unfettered jurisdiction on the Court to restore a company whose affairs had not been fully wound up (for example, the discovery of a significant asset), it would be difficult, if not impossible to ascertain the event which would rebut the presumption of dissolution – the discovery of any significant asset could provide the trigger. He noted further that there would be surprising results; no limitation period; and no need to establish locus standi as anyone having an interest, however speculative, could apply. He further intimated that as long as a significant asset is discovered to exist, even years after the deemed dissolution of a company, a disgruntled creditor could insist upon its recovery, however impracticable.
In conclusion, Smellie CJ contends that the result could be that a company might never be dissolved and the disruption that would be caused would be the reversal of rights which were deemed to have been settled when the company was wound up. Quite notably, he also pointed out that giving effect to statutory provisions which would permit such fundamental and important consequences is not properly a matter for judicial construction against the background of legislation which could readily have expressly adopted them were that the intention and that such legislative shortcomings, required legislation to remedy them. In his view, it was inappropriate that judicial construction should strain to fill the breach. He ultimately dismissed the application for an Order to restore a dissolved company to the register in that case, on the basis that the company’s presumed dissolution under the Act following its voluntary winding up was not rebuttable, even if it were found still to have assets and liabilities and asserted that the Act did not provide for the presumption of dissolution to be rebutted and for the voluntary winding up of a company to be reversed. CJ Smellie’s decision in Schramm and Hiscox Syndicate 33 v Financial Secretary was affirmed by the Cayman Islands Court of Appeal and Campillo v. Registrar of Companies overruled.
Obviously, the Cayman Islands has elected not to enact a statutory process for applicants to restore dissolved companies, unlike other jurisdictions where the elected representatives have passed laws which permit applications for companies that have been dissolved to be restored within a specific timeframe. In the Matter of Real Estate and Finance Fund, FSD 135 of 2022 (IKJ) Reasons for Decision dated 24 August 2022 (unreported), Kawaley J observed that the legislative policy underpinning the relevant provisions in the Act heavily favoured finality, or “ letting sleeping dogs lie” and that even a victim of fraud must generally demonstrate (a) a strong probability that he is indeed a victim of fraud and (b) a realistic prospect that some practical benefit is likely to flow from setting aside the impugned dissolution. Notwithstanding the above, Kawaley J, for the first time, set aside a dissolution following a voluntary winding up in that matter, upon finding that fraud had occurred in the voluntary liquidation of the company and granted the declaratory relief sought in that matter to void that company’s purported dissolution; place the liquidation of the company in question under the supervision of the Court; and appoint the petitioner’s joint official liquidators.
Whilst the Court has on various occasions expressed reservations to exercise its jurisdiction to set aside a dissolution, in essence, giving due regard to the conscious and deliberate public policy decision by the Cayman Islands to embrace the features of certainty and finality in relation to dissolved entities, it has nevertheless displayed a willingness to do so, in exceptional circumstances revolving purported dissolutions vitiated by fraud.
Requirements to Recall Voluntary Liquidation before Final Meeting
By virtue of section 111(1) of the Act, the Court may at any time after an order for winding up, on application of the liquidator or any creditor or contributory, and on proof to the satisfaction of the Court that all proceedings in the winding up ought to be stayed, make an Order staying the proceedings either completely or for a limited time, on such terms and conditions as the Court thinks fit. The focus of this section however will be on companies subsumed in voluntary liquidation by means of a special resolution passed by shareholders for such companies to be wound up voluntarily, that subsequently wish to be restored to active status on the register of companies maintained by the Registrar of Companies.
The Act provides a framework for the voluntary liquidation of a company to be recalled at any time after the voluntary liquidation of a company has commenced, but before the final meeting has been held. At the request of a voluntary liquidator, the Court may make an Order to recall the voluntary liquidation and restore the company into active status and good standing as it was prior to the commencement of its voluntary liquidation. The application by the voluntary liquidator must be accompanied by:
(a) a special resolution stating that the company will not be wound up and setting out the reasons for such decision;
(b) proof of a recall notice published in the Cayman Islands Gazette; and
(c) such other documents as the Court may consider necessary.
Other documentation would typically include a petition and supporting affidavit setting out all the pertinent matters regarding the company.
Essentially, the Court must be convinced that there are good commercial reasons for an Order to be made to recall the voluntary liquidation of a company, and further, the Court must be satisfied that the reasons for the recall have been carefully considered by the shareholders of the company at the time the special resolution alluded to at (a) above was passed. Consequently, it is imperative that the voluntary liquidator demonstrate that there are reasonable grounds for an Order to be made in the circumstances. If, for example, the rationale for a recall is a substantial investment which would allow the company to continue to trade, then the voluntary liquidator will need to show evidence that such investment would be forthcoming upon an Order being made to recall the voluntary liquidation of a company, as well as illustrate how the company would be able to continue to trade from that point onwards.
If the voluntary liquidator’s application is successful, upon receipt of an Order from the Court, the company must within seven (7) days from the date of the Order, provide the Registrar of Companies with a copy of the Order for its records. In addition to language to the effect that the voluntary winding up of the company be recalled and the company be placed into active status and good standing, the Order would also include, among other things, a provision that the voluntary liquidator be discharged from office and how the costs of the petition should be paid, usually, from the assets of the company as an expense of the liquidation.
This article is for information purposes only and does not purport to be comprehensive or represent legal advice and should not be treated as a substitute for specific advice concerning individual situations. It is intended only to provide a very general overview of the matters to which it relates.
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September 2023