In the recent decision of Camulos Partners Offshore Limited (“the Fund”), the Cayman Islands Court of Appeal has re-emphasised that aggrieved investors may not bring winding-up proceedings merely to exert pressure on funds to accede to investor demands, and has confirmed that even under the new Cayman Companies’ Law, there is no standalone court remedy for unfair prejudice to investors whereby aggrieved investors may compel the purchase of their shares, unlike the position in the United Kingdom.  

Background facts

The Fund was a Cayman Islands feeder fund in a group which, according to its offering documents, invested in a diverse portfolio of undervalued and distressed assets. The Fund received a high number of redemption requests amidst the global financial crisis of 2008, including a redemption request from Kathrein & Co (the “Investor”) for a redemption date of 30 September 2008. The Investor’s redemption request was accepted for a redemption price of approximately US$27 million. Ultimately, in early September 2008, in response to the high number of redemption requests received, the Fund proposed an “exchange offer” restructuring arrangement to investors. The Investor did not accept the exchange offer and instead sought to enforce its redemption. In response, the Fund suspended payment of the redemption price.  

The initial legal proceedings  

In April 2009, the Investor issued an originating summons against the Fund seeking declarations that the full US$27 million remained payable (and that at least 15% of that amount had to be paid in cash). In June, the Fund applied to have the Investor’s originating summons struck out. In July 2009, after learning that the Fund proposed to make a cash payment to investors who had accepted the exchange offer, the Investor threatened to present a winding-up petition against the Fund on just and equitable grounds.

On 3 August 2009, the Fund filed an injunction seeking orders restraining the presentation of a winding-up petition by the Investor, but a single judge of the Grand Court of the Cayman Islands refused to grant the injunction. The Investor immediately filed a winding up petition and then, once the judge’s order was officially sealed a few days later, filed a further winding-up petition on substantially the same grounds.

Given the presentation of the winding-up petitions, the Fund was forced to obtain validation orders to enable it to carry on its business and to make distributions to other investors. In return, the Fund deposited a sum equivalent to the full US$27 million redemption price into court as security for the Investor’s claim.

The appeal

The Fund appealed to the Cayman Islands Court of Appeal and obtained orders staying the winding-up petitions until the determination of the appeal. The appeal was concerned with the circumstances in which a shareholder may bring winding-up proceedings against a fund on just and equitable grounds. The Fund contended that the petitions should be struck out as an abuse of process as there was an alternative, more suitable remedy, in the form of ordinary civil litigation - that is a writ.

Counsel for the Investor relied extensively on the Cayman Islands Court of Appeal decision in Strategic Turnaround as a complete answer to the Fund’s case. Further, the Investor contended that new amendments to the Cayman Companies Law had broadened the scope of the Court’s powers, so as to enable it to make share buy-out or sale orders as a remedy in circumstances which constitute “unfair prejudice” to the interests of shareholders (as was the position under s.459 of the United Kingdom Companies Act 1985 now section 994 of the Companies Act 2006). On this point, the Court of Appeal held that the judge at first instance had been wrong in believing that there had been an expansion of the Court’s powers on the ground of unfair prejudice. The new s.95(3) does not provide a freestanding unfair prejudice remedy, but rather, certain alternative forms of relief to a winding-up order, the grounds for which must first be established.

The Court of Appeal held that filing a contributory’s winding-up petition, in circumstances where the petitioner has an alternative remedy, will amount to an abuse of process and will render the petition liable to be struck out if the petitioner is acting unreasonably in not pursuing that alternative remedy. The two key questions

The Court of Appeal identified two key questions:  

  1. whether there is an alternative remedy available to the petitioner; and
  2. whether the petitioner is acting unreasonably in not pursuing that remedy.  

The Court of Appeal distinguished the decision in Strategic Turnaround on the basis that, in that case, there was no alternative remedy available to the petitioner in respect of the particular circumstances alleged. Given there was no alternative remedy available, the petitioner could not be said to be acting unreasonably in pursuing the only remedy which was available.

A key point of distinction between the facts in Strategic Turnaround and the Camulos case was the deposit into court of the US$27 million by the Fund. In view of the deposit, the Court of Appeal could not accept the Investor’s assertion that by paying other redeeming investors (who had accepted the exchange offer), the Fund had preferred those investors. The Court found that the relief sought by the Investor (principally payment of the US$27 million and orders restraining other investors from receiving further payment) would be available in ordinary civil litigation and accordingly, the first question was answered in the affirmative.

The Court of Appeal next considered the second question - was the investor acting unreasonably in not pursuing the alternative remedy? The Court considered the Investor’s conduct as a whole since filing the original writ action in April 2009 and concluded that the Investor’s objective was to put maximum pressure on the Fund to accede to its demands which, the Court found, is clearly not a proper reason for electing to proceed by way of a winding-up petition. Consequently, the second question was also answered in the affirmative.

The outcome

Accordingly, the Court of Appeal struck out the petition as an abuse of process and awarded costs to the Fund on the indemnity basis (enabling the Fund to recover most of its legal costs).

The decision is important in two respects; First, it confirms that there is no separate standalone remedy in the form of share purchase or sale orders analogous to an ‘unfair prejudice’ petition in the United Kingdom - a petitioner must demonstrate that the company should be wound up on just and equitable grounds and only then will the alternative forms of relief in the new s.95(3) of the Companies Law become available. Secondly, the decision makes clear that disputes between investors and funds should be litigated in ordinary civil proceedings, except in the (potentially rare) circumstances where the investor has no real choice but to seek the winding up of the Fund. If the principal objective in bringing a winding-up petition is to apply pressure to a fund to accede to an investor’s demands, the petition will almost certainty be struck out.