Strike out
Stay in favour of arbitration

In the recent case of Re Grand State Investments Limited,(1) the Grand Court struck out a winding-up petition presented against Grand State Investments Limited by a shareholder claiming a debt (petitioner) on the ground that the alleged debt was disputed on bona fide and substantial grounds. In addition, Mr Justice Parker went on to hold that, had the petition not been struck out, it would have been stayed anyway in favour of arbitration.


Grand State Investments is incorporated in the Cayman Islands as the ultimate holding company for a corporate group engaged in the education sector in China. The petitioner invested in Grand State Investments via the purchase of Series C preferred shares (shares) and, at the same time, entered into a shareholders' agreement with Grand State Investments which is governed by Hong Kong law. The shareholders' agreement provides that any disputes arising in connection with the terms of the agreement are to be resolved by arbitration administered by the Hong Kong International Arbitration Centre (HKIAC).

In September 2020 the petitioner purported to redeem its shares by serving a notice on Grand State Investments which requested payment of its redemption proceeds by 30 October 2020. However, Grand State Investments disputed its liability to pay those sums by that date because of a provision in the shareholders' agreement allowing it to pay redemption proceeds from "time to time out of legally available funds" as and when such funds become available.(2) In other words, Grand State Investments' position was that the requirement to satisfy a redemption request is not automatic (as is often the case) but rather conditional – and that the condition for payment – namely, the presence of legally available funds – was not satisfied here.(3)

The petitioner served a statutory demand against Grand State Investments and, after 21 days had elapsed with no payment, presented a creditor's winding-up petition (petition) on the ground that Grand State Investments should be deemed insolvent and wound up by the Grand Court due to non-payment of the statutory demand.(4) Grand State Investments responded by applying to strike out the petition as an abuse of process on the basis that the alleged debt (being the claimed redemption sum) was bona fide disputed on substantial grounds. Alternatively, Grand State Investments also applied for an order that the petition should be stayed in favour of the HKIAC arbitration in accordance with the shareholders' agreement.

Strike out

As Mr Justice Parker noted, the law in the Cayman Islands on this point is well settled – where a debt which forms the subject matter of a winding-up petition is genuinely disputed on substantial grounds, the general practice of the Grand Court is to strike it out or dismiss it. As has been confirmed by authorities such as Parmalat Capital Finance Ltd v Food Holdings Ltd(5) and Camulos Partners Offshore Ltd v Kathrein and Company,(6) the Cayman courts will not permit petitioners to either use the threat of a winding-up petition to force a company to pay a bona fide disputed debt or make improper use of the winding-up jurisdiction to resolve an inter partes dispute.

In striking out the petition, Mr Justice Parker agreed with Grand State Investments that it was "plainly arguable" that the shareholders' agreement did not require it to pay the redemption sum unless and until it had sufficient legally available funds (such funds not including any monies which were required for Grand State Investments' ordinary course of business). Further, Grand State Investments' obligation under the shareholders' agreement to exercise all reasonable efforts in good faith to increase its legally available funds applied only to the extent that:

  • Grand State Investments had the legal power to compel distributions from its subsidiaries; and
  • the subsidiaries themselves had available funds beyond what they required for use in the ordinary course of business.

Faced with these contractual hurdles, the petitioner sought to avoid the consequences of this construction of the shareholders' agreement by pointing to a bank statement showing that Grand State Investments held some funds that exceeded the statutory minimum for serving a statutory demand under the Companies Act. The petitioner argued that these were legally available funds which had not been paid to the petitioner and that, although the majority of the sums claimed may be amenable to a dispute, the making of a winding-up order was justified.

Mr Justice Parker rejected this contention, following the decision of the English and Welsh High Court in In re a Company (No 003729 of 1982),(7) on the basis that Grand State Investments had disputed the very existence of the debt rather than merely its quantum. In doing so, Mr Justice Parker also distinguished the approach to be taken when considering the existence of a bona fide dispute on substantial grounds from that to be taken on the issue of standing to present a petition.

Given the above findings, Mr Justice Parker found that the issues raised by Grand State Investments in challenging the alleged debt gave rise to a bona fide dispute on substantial grounds and, as a result, the petition was struck out.

Stay in favour of arbitration

The Grand Court also dealt with the alternative basis of Grand State Investments' application – namely, the application for a stay given the presence of an agreement to refer disputes concerning the shareholders' agreement to arbitration. Mr Justice Parker found that, had the petition not been struck out, it would have been stayed in favour of arbitration.

In so doing, the Grand Court relied upon the approach taken by the Cayman courts in decisions such as Re Sphinx Group of Companies(8) and Re Times Property Holdings Ltd,(9) confirming that the court will ordinarily grant a stay of a winding-up petition based on a disputed debt where the underlying dispute falls within the scope of an agreement to arbitrate. Importantly, however, Mr Justice Parker did confirm that the mere presence of a dispute will be insufficient; instead, the Grand Court will need to be satisfied as to the existence of a bona fide dispute on substantial grounds prior to being able to exercise its discretion to stay the petition in favour of arbitration.

Against that background, the Grand Court confirmed that the starting point for the consideration of these issues should be respect for the parties' autonomy to choose a dispute resolution mechanism.(10) However, this alone would not be dispositive of the issue. The Grand Court will look at the circumstances of the case and determine whether, on the particular facts, a stay was appropriate.

In this case, Mr Justice Parker found that the following factors would have justified the grant of a stay in favour of arbitration had the petition not been struck out:

  • there was a valid and operative arbitration agreement;
  • arbitration had been commenced prior to the hearing of the strike-out application;
  • the discrete issues to be determined in the arbitration were issues of foreign law (Hong Kong and Chinese law) with which the Grand Court may not be familiar;
  • certain disputed issues were not amenable to determination on the basis of affidavits or without cross-examination, and where certain key witnesses were non-English speakers, this presented some additional challenges if done in the Grand Court; but
  • the above matters would not be issues in the context of the arbitration as it was to be conducted in Hong Kong; and
  • the language of the arbitration was to be Chinese.

Accordingly, Mr Justice Parker considered that disputes in issue would be best decided by arbitrators familiar with Hong Kong law and fluent in both Chinese and English. That was all the more important where the relevant witnesses all spoke Chinese and a number of documents exhibited at the hearing had also been in Chinese.


The decision in Grand State is a reminder for redeeming shareholders to carefully review the contractual terms which govern the exercise of redemption rights before presenting a winding-up petition. Otherwise, they risk having a petition struck out or stayed. Should that happen, adverse costs consequences will also follow.

This case also confirms that the Grand Court will respect arbitration agreements and not rush to invoke the winding-up jurisdiction when it would interfere with the parties' contractually agreed dispute resolution mechanism – provided that the dispute in question is not merely being raised by the company to avoid the inevitable.

For further information on this topic please contact Michael Snape or Nicholas Tam at Ogier's Hong Kong office by telephone (+852 3656 6000) or email ([email protected] or [email protected]). Alternatively, contact Christopher Levers or Nour Khaleq at Ogier's Grand Cayman office by telephone (+1 345 949 9876) or email ([email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.


(1) 28 April 2021, FSD 11/2021 (RPJ).

(2) The terms of the shareholders' agreement and Grand State Investments' articles of association were identical in this respect.

(3) Grand State Investments also raised issues regarding the waiver, by the petitioner, of its right to redeem. However, given the Grand Court's determination on the above issues, there was no need to deal with that issue.

(4) Section 92(d) of the Companies Act (2021 Revision).

(5) [2008] CILR 202.

(6) [2010] 1 CILR 303.

(7) [1984] 1 WLR 1090 at 1094 (Mervyn Davies J).

(8) Unreported, Court of Appeal, 2 February 2016.

(9) [2011] 1 CILR 223.

(10) See Salford Estates (No 2) Limited v Altomart Limited [2014] EWCA Civ 1575.