The attractions of incorporating a company in the Cayman Islands, the fifth-largest banking centre in the world, are numerous – no direct taxes, political and economic stability and a reliable legal system, to name a few. However, the means of redress available to an unfairly treated shareholder are limited: litigation is the main form of dispute resolution in the Cayman Islands.
The Companies Law (2013 Revision) provides an alternative remedy for shareholders: the Grand Court can appoint "one or more competent inspectors to examine into the affairs of any company (incorporated in the Cayman Islands) and to report thereon" on the application of one (or more) shareholders.
In some instances the appointment of an inspector is the most timely and cost-effective solution to a dispute. This update reviews:
- the circumstances under which it might be appropriate for a shareholder to apply for the appointment of an inspector;
- how to make such an application;
- what powers the inspector might be afforded by the court; and
- the advantages and disadvantages of seeking such an appointment.
Under the Companies Law, an application for the appointment of an inspector can be made by a shareholder or shareholders holding at least 20% of the issued shares of the company. Where a company does not have a capital divided into shares, an application can be made by shareholders accounting for not less than 20% of their total number.
A 'competent inspector' is not defined, but a qualified insolvency practitioner with relevant experience would make for a suitable appointment.
The most likely reason for a shareholder to exercise this right under the Companies Law would be that he or she is being denied key information relating to the finances and records of the company. The Companies Law specifies that all officers and agents of the company must produce all books and documents in their custody or power to an appointed inspector, who also has the power to examine any officer or agent of the company under oath.
As a court-appointed officer, an inspector is obliged to complete the investigation within a reasonable timeframe. On conclusion of the investigation, the inspector is required to file the findings and opinions with the court. Although not usually open to public inspection, any information reported to the court by the inspector is admissible as evidence in any legal proceeding relating to any of the matters investigated.
The inspector's report is therefore invaluable to a shareholder who might want to take legal action against a company in the Cayman Islands (particularly in a winding-up on 'just and equitable' grounds), but who lacks sufficient evidence to bring such action and has no other resource available (access to company information is difficult in the Cayman Islands, which is committed to strict confidentiality laws).
In In The Matter of Fortuna Development Corporation [2004-05] CILR 197, a minority shareholder petitioned for the winding-up of a company on just and equitable grounds, based on allegations that the majority shareholders were acting in an oppressive and prejudicial manner towards the minority. In that case, the Grand Court refused to appoint liquidators, but instead appointed inspectors over the company, who had wide-ranging powers to examine documents and question witnesses. The remit of their investigation also included the company's wholly and partially owned subsidiaries. The court stated that there was "no question" that the inspectors' report would "be influential, perhaps dramatically so, in any subsequent litigation".
This case also determined that auditors were, for the purposes of the law, 'agents' of the company and had a duty to produce all relevant books and documents in their custody or power.
Importantly, the Companies Law does not limit the powers that the court can afford to an inspector, so the draft order attached to the application should be drafted appropriately to suit the facts of the case. Other than those powers outlined above, the judge may exercise his or her discretion to empower an inspector to, for example:
- examine the company's trading activities;
- identify its assets and liabilities (and those of its subsidiaries);
- examine the company's financial statements;
- review related-party transactions; and
- review all contractual and licensing documentation relating to the business of the company and its subsidiaries.
An application can be made by a shareholder or shareholders meeting the share capital threshold outlined above. Possible grounds for the appointment include:
- lack of adherence by the directors to proper corporate governance;
- unwillingness of the board to report to the shareholders;
- possible breach by the board of the fiduciary duties owed to the company; and
- failure to comply with provisions in either or both of the company's memorandum and articles of association or a shareholders' agreement.
Where the assets of the Cayman company are located outside the Cayman Islands, the court will normally appoint a local insolvency practitioner (who meets the requisite residency qualifications) jointly with a foreign practitioner based in the relevant jurisdiction.
The process is relatively quick (the Grand Court has previously ordered inspectors to file their report within six weeks), cheap (the court has the discretion to order that the expenses of the appointment be paid out of the assets of the company) and easy.
The main benefit is the weight that the court will attach to the inspector's report. Even where the directors of the company are uncooperative or unwilling to abide by the terms of the court order, this could in itself be evidence of misconduct, mismanagement or breach of fiduciary duties on the part of the directors, which could form grounds for winding up a company.
The appointment also presents an alternative option: it may put pressure on the executive directors to cooperate more fully with the shareholders to rebuild a relationship of trust and confidence so as to negate any need to enter into litigation or liquidate the company.
The most commonly occurring difficulty following the appointment of an inspector is that the executive directors fail to comply with the terms of the order appointing them and make no effort to furnish the inspector with the books and records of the company.
However, failure on the part of the directors to abide with the terms of the court order may in itself constitute the necessary grounds for bringing a subsequent action against the company.
The appointment of an inspector is a time and cost-efficient method of securing information on a company's financial affairs. The enquiry power of an inspector is particularly compelling, as the officers and agents of the company under inspection are obliged to provide all documents in their custody or power to the inspector. An inspector may also examine officers and agents under oath and criminal penalties can be imposed for non-compliance with any request made by an inspector. This information can help to form the backbone of any subsequent action, such as a derivative claim.
In many cases, the appointment of an inspector may be a necessary precursor to a winding-up application. Where a shareholder has insufficient evidence to seek the appointment of liquidators, the ability to appoint an investigator to scrutinise the affairs of the company – and report to the court thereon – is likely to assist greatly in such an application.
For further information on this topic please contact David Butler at Harney Westwood & Riegels' Cayman Islands office by telephone (+1 284 494 2233) or email (firstname.lastname@example.org). Alternatively contact Ian Mann or Arigen Liang at Harney Westwood & Riegels' Hong Kong office by telephone (+852 3195 7200) or email (email@example.com or firstname.lastname@example.org). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.