The JCPC ultimately allowed the appeal, finding that a shareholder has a right of action against the company to challenge the allotment of shares by the board of directors on the basis that the allotment was made for an improper purpose in circumstances where the allotment will cause detriment to the shareholder.

Background

The background to the dispute concerns a long-standing battle for control of the respondent company, China Shanshui Cement Group Ltd (the “Company”), a Cayman exempted company registered in Hong Kong as a non-Hong Kong company and listed on the Hong Kong Stock Exchange. The Company is a holding company of operating subsidiaries registered in Hong Kong and the People’s Republic of China (“PRC”), with the group being principally engaged in the production, distribution and supply of cement in the PRC.

The appellant, Tianrui (International) Holding Company Ltd (“Tianrui”) is a company incorporated in the British Virgin Islands with a shareholding of 28.16% of the Company. The other major shareholders of the Company are Asia Cement Corporation (“ACC”) with a 26.72% shareholding, China National Building Materials Co Ltd (“CNBM”) with a 16.67% shareholding, and China Shanshui Investment Company Limited (“CSI”) with a 25.09% shareholding.

In around May 2018, a majority of shareholders of the Company, including ACC, CNBM and CSI, voted at an extraordinary general meeting (“EGM”) of the Company to reconstitute the board of directors, with the reconstituted board comprising one director from CNBM, one director from ACC and three independent non-executive directors.

In or around August and October 2018, the Company issued convertible bonds in two tranches. At a subsequent EGM, a majority of shareholders passed a resolution mandating the directors to allot and issue new shares in the Company to the holders of the convertible bonds.

Tianrui alleged that the bondholders were parties connected to or affiliated with ACC and CNBM and that the issuance and allotment of shares was for the purpose of diluting Tianrui’s shareholding and obtaining control of the Company. Tianrui’s shareholding was decreased from 28.16% to 21.75%, with the result that Tianrui could no longer block special resolutions as its shareholding was under 25% and that, if the share issuance was valid, Tianrui could not prevent the merger of the Company and may have to have its shares bought out under s.238 of the Companies Act.

Tianrui commenced a writ action against the Company, seeking declarations that the exercise by the directors of the Company of the powers (i) to issue the convertible bonds, (ii) to convert the bonds into shares, and (iii) to issue the new shares, were not valid exercises of the relevant powers. The Company sought to strike out Tianrui’s claim as an abuse of process on the basis that Tianrui did not have standing to sue the Company for claims concerning alleged breaches by the directors of their fiduciary duties owed to the Company.

In the first instance decision in the Grand Court, Segal J rejected the argument that a shareholder did not have a personal claim because the shareholder could obtain redress by a derivative action, declining to follow the Court’s earlier decision in Gao v China Biologic Products Holdings, Inc [2018 (2) CILR 591] where the Court struck out a writ by a minority shareholder challenging the exercise of powers by a board of directors on the ground that the plaintiff lacked standing. Segal J held that Tianrui did have standing to bring a claim against the Company for improper dilution.

The Company appealed to the Court of Appeal, with the central question for the Court of Appeal being whether a minority shareholder had standing to sue the company in which it held shares in the face of two possible obstacles: first, that directors owe their fiduciaries duties to the company which appoints them and not to its shareholders, and secondly, the view that the damage suffered as a result of a breach of fiduciary duty by the directors is damage to the company itself, and not to the shareholder whose voting power has been diminished by the issue of new shares.

The Court of Appeal allowed the appeal, concluding that it remained Cayman law that an aggrieved shareholder has no personal right of action against the company and must found their claim on a basis that is consistent with the rule in Foss v Harbottle or with the fraud on the minority exception to that rule (discussed further below).

Privy Council decision

Tianrui then appealed to the JCPC, which heard the appeal in March 2024.

Issues for determination

The central issues for the JCPC’s determination were as follows:

• In circumstances where the duty of the directors alleged to have been breached is owed to the company, and not to its shareholders, what, if anything, is the shareholder’s cause of action?
• What, if any, distinctive aspects of the shareholder’s cause of action mean that it may be pursued notwithstanding the rule in Foss v Harbottle?
• Was the impugned exercise of the board of directors’ power void or voidable?
• Was the alleged breach of duty capable of being ratified by a majority of the company’s shareholders? If so, what is the consequence of the theoretical availability of ratification for the pursuit of the shareholder’s claim in the meantime?

JCPC’s findings

The JCPC ultimately allowed the appeal, finding that a shareholder has a right of action against a company where the board of directors has allotted shares for an improper purpose and this has negatively affected the shareholder. Accordingly, the JCPC held that the writ against the Company should not have been struck out and should be reinstated.

The JCPC recognised that the underpinning challenge by the Company to the right of Tianrui to bring the proceedings was the rule in Foss v Harbottle, made up of two related principles:

• First, where a wrong has been done to a company, only the company, not an individual shareholder, can take action. A breach by a director or by the board of directors of a duty which is owed to the company is a wrong done to the company, and the general rule is that only the company has a remedy for that breach.
• Secondly, the will of the majority of the shareholders of the company should, as a general rule, prevail in the running of the company’s business. Thus, if a transaction can be made binding on the company by a simple majority of shareholders, and that majority does not want to take action against a director or directors for breach of duty in relation to it, the majority can, as a general rule, waive the breach or ratify the irregular acts of the director or directors.

The exception to the operation of these principles is where the wrongdoers are themselves in control of the company. In that event, which is often called “fraud on the minority”, the aggrieved shareholder can bring a derivative action seeking relief on behalf of the company in which the cause of action is vested.

The JCPC reviewed the leading cases in England and Australia considering the exercise by directors of their powers for an improper purpose, citing the decisions of, inter alia, Punt v Symons & Co Ltd [1903] 2 Ch 506, Hogg v Cramphorn Ltd [1967] Ch 254, Bamford v Bamford [1970] Ch 2012, Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, Ngurli Ltd v McCann (1953) 90 CLR 425, and Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160. The JCPC highlighted that these cases had not considered the jurisprudential basis for a shareholder’s standing to bring a personal claim against a company.

In coming to the view that a shareholder whose holding is diluted by an improper allotment of shares by the directors may bring a personal claim against the company challenging the validity of that allotment, the JCPC adopted a “first principles” approach and provided the following analysis:

• The basis of a shareholder’s right to bring an action against the company to challenge an improper exercise of the directors’ powers to allot and issue shares is the contract between the shareholder and company set out in the memorandum and articles of association. The conferment upon the directors of its fiduciary powers to allot and issue shares is an important part of the contract between shareholders and the company, and it is implicit that the exercise of such fiduciary powers must be for a proper purpose.
• The right of a shareholder to sue the company is not dependent upon the alteration in the balance of power being adverse only to a minority of shareholders, nor is the personal right to sue dependent on the claiming shareholders being, or being part of, a majority. The JCPC considered that the size of the claimant’s shareholding was in principle irrelevant, and what mattered was that the claiming shareholder suffered an interference with its shareholder rights brought about by the improper share issue and allotment.
• It is irrelevant whether the company itself had a cause of action against the directors for a breach of duty owed to it. A shareholder’s action against the company could coexist with an action by the company in respect of the same breach of duty by the directors, so that the availability of the latter by no means excludes the former.
• Shareholders of a solvent company may, acting unanimously, ratify any action taken by the directors which falls within the corporate capacity of the company itself. However, if the shareholders seek to use their power to act by a majority, then they are constrained by the equitable principle that they may not do so by way of oppression of the dissenting majority and that constraint is inherent in the power of the majority of a class to bind the minority. Accordingly, the theoretical possibility of ratification was not sufficient to deprive a claimant shareholder of a cause of action.

Applying its analysis of the relevant principles, the JCPC concluded that the facts of this appeal presented a strong case for the availability of the shareholder’s personal action against the Company, finding that the writ should not have been struck out by the Court of Appeal and allowing the appeal.

Comment

The JCPC’s judgment provides welcome guidance on the ability of an aggrieved shareholder to bring a personal claim against a company in circumstances where a breach of fiduciary duty is alleged to have occurred, particularly where there has been an issuance and allotment of shares for the improper purpose of diluting the shareholder’s holding in a company.

The decision is also a significant development of the rights of shareholders in the Cayman Islands where there are no standalone statutory remedies available for minority oppression or unfair prejudice and where any shareholder remedies are largely obtained through the just and equitable winding up and/or derivative action regime, which may not always be fit for purpose in the circumstances of the case.

It remains to be seen whether the ability of a shareholder to bring a personal claim where their rights have been infringed is expanded outside of the context of improper dilution and what impact ratification may have to defeat personal claims of shareholders.

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In the recent judgment of Kuwait Ports Authority and Ors (Respondents) v Mark Eric Williams & Ors (Appellants),[1] delivered on 28 October 2024, the Judicial Committee of the Privy Council (“JCPC”) clarified the test for determining whether a limited partner in a Cayman Islands exempted limited partnership (“ELP“) is entitled to bring a derivative action on behalf of the ELP. This test is governed by section 33(3) of the Exempted Limited Partnership Act (2021 Revision) (“ELP Act”), which provides that such an action may be brought by a limited partner only if the general partner has “without cause, failed or refused to institute proceedings”. This is the first case in which this test has been considered by the JCPC.

The Board ultimately dismissed the appeal, finding that the limited partner Respondents had the right to bring the derivative action because the general partner had failed to bring proceedings without cause as its decision making was subject to a relevant inhibition in the form of a conflict of interest. In doing so, the Board overruled certain material aspects of the lower Court decisions, and endorsed eleven principles which will serve as a useful guide for approaching and determining future applications made under section 33(3).

The Board also dismissed the Respondents’ cross-appeal, which concerned the point at which the section 33(3) test is to be assessed, upholding the Court of Appeal’s finding that the relevant point in time is the date of the strike out hearing, rather than, as the Judge had held, the time the derivative action was commenced.

Background

The Port Fund L.P. (the “Fund”), a private equity fund structured as an ELP, is the subject of ongoing litigation in the Cayman Islands[2], and is the first Cayman Islands ELP in which limited partners have brought derivative claims under section 33(3) of the ELP Act. The relevant limited partners are two Kuwaiti state entities, the Kuwait Ports Authority and the Public Institution for Social Security (“KPA” and “PIFSS” respectively, together the “Respondents”).

The Respondents have issued proceedings against (amongst others) Port Link GP Ltd (the general partner of the Fund – the “General Partner”), Mark Williams (the ultimate beneficial owner of the General Partner), Wellspring Capital Group Inc (“Wellspring”), and KGL Investment Company Asia Ltd (“KGLI Asia”) (together, the “Appellants”). The Respondents’ claims are in unlawful means conspiracy, and allege dishonest breaches of trust and fiduciary duty, knowing receipt and/or dishonest assistance. The claims are brought both as direct claims for the alleged loss each Respondent claims to have suffered as a limited partner of the Fund, and as derivative claims on behalf of the Fund.

In the Grand Court of the Cayman Islands, the Appellants and the General Partner sought to strike out the Respondents’ derivative claims on the basis that the Respondents did not have a right to bring such actions by operation of section 33 of the ELP Act, subsection 1 of which provides that a claim belonging to an ELP must be brought by the general partner acting on behalf of the ELP. Exceptionally, pursuant to section 33(3) of the ELP Act, a limited partner may bring a derivative claim for and on behalf of an ELP if the general partner has “without cause, failed or refused” to bring the claim.

The Appellants and the General Partner argued that the Respondents did not have a right to bring the derivative actions because the professional directors of the General Partner, who took office after the alleged wrongdoing, had conducted an extensive investigation into the subject matter of the derivative claims and concluded that there was not cause to bring the derivative claims advanced by the Respondents. Having taken these steps, it was submitted that the General Partner had not, without cause, failed or refused to institute proceedings, and therefore the Respondents did not have a right to bring a derivative claim on behalf of the Fund.

The Respondents argued that section 33(3) does not require the Court to embark on a detailed enquiry of the merits of the underlying claims. Their case was that the derivative claims are maintainable as pleaded and that the General Partner had a reasonable opportunity to bring those claims but did not do so. It therefore failed to do so “without cause”, within the meaning of section 33(3) of the ELPA.

On 25 November 2021, the Grand Court found[3] that there was a good arguable case that the General Partner had failed or refused to bring the claims, and that it still has a ‘relevant inhibition’ to do so because it is conflicted (it being the target of or alleged to be implicated in certain of the claims). The Grand Court therefore dismissed the strike-out applications.[4]

The Appellants and the General Partner appealed to the Court of Appeal of the Cayman Islands (the “CICA“). On 20 January 2023, the CICA struck out[5] the derivative claim against the General Partner on the basis that direct claims are being pursued against it. However, it upheld the Grand Court’s decision not to strike out the derivative claims brought against the Appellants owing to the inhibition of the General Partner.[6]

Privy Council decision

The Appellants appealed to the JCPC, which heard the appeal in June 2024.

JCPC’s findings

The JCPC ultimately dismissed the appeal and the cross-appeal.

The JCPC agreed with the reasoning and conclusion of the CICA that a failure to bring proceedings may be “without cause” for the purposes of section 33(3) where the decision making is subject to a relevant inhibition, and that an actual conflict of interest would amount to a relevant inhibition.[7] In this case, the JCPC found that the General Partner had an actual conflict of interest by reason of it (amongst other things) having been the subject of the derivative claim that it refused to bring.[8]

The Board also agreed with the CICA and Grand Court that the fact that a commercial decision was taken by the General Partner’s professional directors not involved in the alleged wrongdoing did not avoid that conflict of interest for three reasons:[9]

• if the General Partner was subject to a disqualifying conflict of interest in making the decision whether or not to bring proceedings then that is not affected by the identity or independence of its directors;
• the directors were also subject to a disqualifying conflict of interest as they owed a duty to act in the best interests of the General Partner and where there is a conflict between the interests of the General Partner and the Fund then that duty puts the directors in a conflicted position; and
• the directors were unable to assess the claims properly in an independent and objective way because they had been guided in their investigations by information provided by those who were under investigation themselves, and by their legal advisers, who were also conflicted.

Finally, the JCPC disagreed that any perceived potential conflict of interest would inevitably render any decision not to bring such claims as one “without cause”. The JCPC held that the CICA’s findings are only likely to apply in the case of a claim against persons closely associated with the general partner, or a claim in which the general partner is implicated, and which is seriously arguable.[10]

More generally, the JCPC found that the CICA erred in adopting a two stage approach whereby the court considers first if the section 33(3) “without cause” test is satisfied, and secondly whether as a matter of discretion the derivative claim should be permitted. The JCPC ruled that there is only a single evaluative decision to be made as to whether the statutory requirements are met, but that decision allows for account to be taken of discretionary considerations. For the same reason, it is not strictly correct to refer to the court permitting or allowing derivative proceedings to be brought. There is no permission or leave requirement.[11]

With respect to the cross-appeal, the JCPC agreed with the CICA’s conclusion that the court should reach its decision by reference to the facts as they appear at the date of the hearing of the strike out or preliminary issue. This approach allowed, amongst other things, the court to have regard to circumstances that may have changed since the initiation of the proceedings including, for example, the removal of the inhibition or conflict that was the basis for contending that the refusal or failure to institute proceedings was without cause.[12]

JCPC’s guidance for future applications

In light of the JCPC having found that the CICA erred in certain respects, the JCPC took the opportunity to clarify the guidance given by the CICA as to how applications under section 33(3) should be approached and determined. Specifically, the JCPC set out eleven principles which will serve as a helpful guide in future applications made under section 33. Those principles are as follows:[13]

1. There is no requirement for leave to bring derivative proceedings under section 33(3) of the ELP Act. A limited partner may simply institute such proceeds.
2. A limited partner must however plead the facts and matters relied upon as showing that it can bring itself within the requirements of the subsection.
3. If a defendant wishes to raise an issue as to whether the requirements of the subsection are met, it should do so by means of a strike out application or seek the trial of a preliminary issue.
4. Whichever of these routes is chosen does not affect the test which has to be applied in deciding whether section 33(3) is complied with.
5. The decision of the court on such an application or preliminary issue is determinative (subject to appeal). If the court holds that the derivative claim may be continued, the limited partner may pursue the claim. It is not an issue which is deferred until or revisited at trial (save possibly in the context of costs at the end of the trial).
6. The court should not conduct a mini trial as to whether the requirements of section 33(3) are satisfied. The Court has to reach its decision on the basis of the material before it, which will be more limited than it will be following discovery and trial.
7. At the hearing, the onus in on the limited partner to satisfy the court that the requirements of section 33(3) are met.
8. The essential task for the court at such a hearing is to determine whether the limited partner has brought itself within the terms of section 33(3), namely that the general partner has failed or refused to bring the relevant proceedings without cause.
9. In determining this issue, the court is likely to be assisted by consideration of whether “special circumstances” (as developed in cases concerning trusts, limited partnerships and other entities) exist, but the court’s task remains one of applying the statutory test set out in section 33(3).
10. The court should consider, inter alia, the strength of the evidence that the general partner has failed or refused to institute proceedings without cause, the strength of the underlying claim which is sought to be brought and the likelihood and nature of any injustice if the derivative claim does not proceed. This will allow for account to be taken of discretionary considerations, such as whether the plaintiff has an alternative remedy.
11. The court should reach its decision by reference to the facts as they appear at the date of the hearing of the strike out or preliminary issue.

Comment

This decision will be of interest to private equity and other stakeholders familiar with the widely-used Cayman ELP structure. The JCPC’s judgment provides welcome guidance regarding the approach to be taken to limited partner derivative claims under section 33. On one view, the JCPC’s judgment sets the bar for such derivative claims relatively low, enabling limited partners to pursue claims derivatively that the general partner may have legitimate reasons not to pursue by implicating the general partner in the derivative claim. This may therefore lead to an increase in the number of derivative claims that are threatened or brought by limited partners against general partners and others. Conversely, limited partners may take comfort from their ability to pursue claims derivatively should the need arise.

The post The Port Fund: Privy Council clarifies test for derivative action by a limited partner appeared first on Campbells.

The British Virgin Islands (“BVI”) continues to strengthen its financial services sector by aligning with international standards, including those set by the Financial Action Task Force (FATF). The BVI Business Companies (Amendment) Act 2024 (the “Amendment Act”), which modifies the BVI Business Companies Act (the “Act”), was published in the BVI Gazette on 26 September 2024. While it has not yet come into force, it’s anticipated to be implemented soon.

Below, we highlight the key amendments:

Register of Members

The Amendment Act introduces clarifications regarding the information required in a company’s register of members. Specifically, details about nominee shareholders must be maintained and filed with the BVI Registrar of Corporate Affairs (the “Registrar”).

Additionally, companies are now required to file their register of members with the Registrar within 30 days of incorporation or continuation into the BVI. Any changes to the register must also be filed within 30 days of such changes. Notably, the register of members will remain private unless the company opts to make it publicly accessible.

Listed companies and BVI funds are exempt from filing their register of members, but only at the time their shares are listed or when they are registered as a fund. Otherwise, the standard filing requirements apply. Companies that have been struck off, dissolved, and subsequently restored to the register are not required to submit a copy of their register of members.

Beneficial Ownership

The Amendment Act adopts the commonly accepted definition of a “beneficial owner” (i.e., ownership or control of 10% or more) and mandates that companies collect, maintain, and keep updated records of beneficial ownership information.

The Act also shifts the responsibility for filing beneficial ownership data from the Beneficial Ownership Secure Search Portal to the Registrar. Companies must file this information within 30 days of incorporation or continuation into the BVI.

Certain companies are exempt from this requirement, including:

• companies whose shares are listed on a recognised exchange; or
• BVI funds where such funds beneficial ownership information is held by either (i) a person who holds a Category 6 investment business licence in accordance with the Securities and Investment Business Act (as revised), or (ii) its authorised representative or other person licensed by the Financial Services Commission that has a physical presence in the BVI, and such person ensures that the beneficial ownership information can be provided to the Registrar within 24 hours of a request for such information.

In such cases, a notice must be filed with the Registrar within 30 days, providing the name and address of the individual holding the beneficial ownership information. Registered agents must verify the accuracy of beneficial ownership information prior to filing, and companies must update the Registrar within 30 days of any changes. Importantly, this information will not be publicly accessible.

Registered agents will be required to take reasonable measures to verify the beneficial information provided prior to filing and, where beneficial ownership information changes, the company must file information in respect of the change within 30 days of becoming aware of the same.

Significantly, this filing with the Registrar is not publicly accessible.

Appointment of first directors

The Amendment Act provides that the registered agent of a company must appoint a first director or directors within 15 days of the date of incorporation of the company. Previously a first director or directors was required to be appointed within 6 months of the date of incorporation of a company.

Rectification of register of directors

Where a register of directors does not include information or includes inaccurate information, or there is an unreasonable delay in entering the required information, the Amendment Act provides that a member, director, or any person aggrieved by the omission of the relevant information may apply to court for an order to rectify the register of directors.

Continuation under foreign law

Where a BVI company intends to redomicile out of the BVI, the Amendment Act widens the scope of the declaration that the directors are required to file with the Registrar. The declaration must include confirmation that a company does not have any pending requests from a competent authority to produce documents or provide information that has not been satisfied, that no receiver has been appointed over the company or its assets, and that the company is not aware of any legal proceedings pending against it or its shareholders, directors, officers or agents as it directly pertains to the affairs of the company.

Next Steps

For further questions or concerns regarding the Amendment Act, please reach out to your usual Campbells contact.

The post Campbells’ Guide to the 2024 BVI Business Companies Act Amendments appeared first on Campbells.

In respect of existing ordinary trusts, it is possible for the trustees of the trust (amongst others) to apply to the Grand Court of the Cayman Islands to disapply the rule against perpetuities, the effect of which will be that such trusts can last indefinitely.

Contact

For further information please contact your usual Campbells contact or reach out to any of the key contacts listed below.

The post Amendments to Cayman Perpetuities Legislation appeared first on Campbells.

Zhong Ou International Diversified Fund SPC is a mutual fund registered with the Cayman Islands Monetary Authority and managed by Zhong Ou Asset Management International Limited (“ZOAM Intl”). ZOAM Intl is a wholly-owned overseas subsidiary to Zhong Ou Asset Management Co., Ltd., which is a prestigious asset manager in Mainland China, and acts as its global investment center to serve overseas investors. The investment coverage of ZOAM Intl includes, among others, fixed income investment (Chinese onshore bonds, Chinese issuer USD bonds, Asian bonds, ESG bonds) and equity investment in Chinese A-shares and the Hong Kong market.

Partner Robert Searle led the transaction with support from Ben Tao and Hans-Peter Alphart.

The post Campbells advised Zhong Ou International Diversified Fund SPC on its CSX listing appeared first on Campbells.

 Following our advisory issued on 11 October 2023, the Beneficial Ownership Transparency Act, 2023 (the “Act”) and the Beneficial Ownership Transparency Regulations, 2024 (the “Regulations”) were brought into force on 31 July 2024 (the “Commencement Date”).  Associated Guidance on Complying with Beneficial Ownership Obligations in the Cayman Islands (the “Guidance”) was also published by the Cayman Registry (the Competent Authority for beneficial ownership in the Cayman Islands) (the Guidance, the Act and the Regulations, together the “New BOR Legislation”).

The Ministry of Financial Services for the Cayman Islands (the “Ministry”) has advised industry members to suspend filing beneficial ownership information for existing Cayman entities under the current framework until industry is notified to commence filing under the new beneficial ownership framework.  The Ministry has also advised that enforcement relating to the new requirements in the framework will be suspended until early next year, giving clients a few months to prepare for these changes.

Background

Our advisory published on 20 April 2017 sets out in detail the beneficial ownership regime in the Cayman Islands (the “BOR”) that applied before the Commencement Date.

Key Changes to the BOR

 The following substantial changes have now been made to the Cayman Islands BOR as a result of the New BOR Legislation:

In Scope Entities

Cayman Islands companies, limited liability companies, limited liability partnerships and foundation companies continue to be in scope for the purposes of the BOR.  For the first time, the New BOR Legislation has now brought into scope exempted limited partnerships (commonly used as closed-ended funds) and limited partnerships (together “Legal Persons”).  Trusts and registered foreign companies continue to fall out of scope of the BOR.

In addition, entities such as general partners, subsidiaries of regulated entities, entities registered under the Securities Investment Business Act or the Virtual Asset Service Providers Act that were previously exempt from the BOR will now need to identify their registrable beneficial owners (“RBOs”) and provide details of their RBOs to their corporate services provider (“CSP”), save for those entities permitted to utilise the Alternative Compliance Route (as defined below).

Registrable Beneficial Owners

A RBO in relation to a Legal Person means an individual Beneficial Owner or a Reportable Legal Entity (“RLE”).

Individual RBO

The Act defines a “Beneficial Owner” as an individual who meets any of the following specified conditions:

• the individual ultimately owns or controls, whether through direct or indirect ownership or control, twenty-five per cent or more of the shares, voting rights or partnership interests in the Legal Person;
• the individual otherwise exercises ultimate effective control over the management of the Legal Person; or
• the individual is identified as exercising control of the Legal Person through other means.

Where an individual operates solely in the capacity of a “Professional Advisor” (which includes a lawyer, accountant, professional advisor or a financial advisor who provides advice or direction in a professional capacity) or a “Professional Manager” (which includes a liquidator, receiver or restructuring officer who exercises a statutory function), such individual will not be considered to meet the definition of a Beneficial Owner under the Act.

The Act also considers the following persons as individuals:

• a corporation sole;
• a government or government department of a country or territory or a part of a country or territory;
• an international organisation whose members include two or more countries or territories (or their governments); and
• a public authority.

Trustees

Where no individual meets any of the definitions of a Beneficial Owner but the trustees of a trust meets one of the definitions of a Beneficial Owner, the trustees of the trust will be the Beneficial Owners of the Legal Person if they have ultimate effective control over the activities of the trust other than solely in the capacity of a Professional Advisor or a Professional Manager.

Senior Managing Official

If no individual meets the definition of a Beneficial Owner, the Act provides that a Legal Person’s “Senior Managing Official” (“SMO”) will be identified as the contact person.  A Senior Managing Official includes (for the first time under the BOR) a director or a chief executive officer of the Legal Person and the Guidance provides further clarity on who to identify as a SMO in this respect.

Reportable Legal Entity

A reportable legal entity or “RLE” in relation to a Legal Person means another Legal Person (other than a foreign company, foreign entity or a foreign limited partnership) that if it were an individual would be a beneficial owner of the first mentioned legal person.

It is not necessary for a Legal Person to report individual beneficial owners of a RLE since that entity will itself have its own reporting obligations under the New BOR Legislation.

Alternative Compliance Route

Any Legal Person:

• licensed under a regulatory law[1];
• listed on the Cayman Islands Stock Exchange or an approved stock exchange[2]; or
• that is a subsidiary of an entity listed on the CSX or an approved stock exchange,

may provide their CSP with details of their regulatory license or listed status rather than provide details of their RBO.  The Legal Person’s CSP will in turn provide this information to the Competent Authority and this process is the “Alternative Compliance Route”.

Investment Funds

Legal Persons which are registered as mutual or private funds (“Registered Funds”) with the Cayman Islands Monetary Authority (“CIMA”) may provide their CSP with details of a “contact person” rather than their RBOs.  The contact person will not be required to maintain a beneficial ownership register, but must provide the Competent Authority with the requested beneficial ownership information within twenty-four hours of a request being made, or at any other time as the Competent Authority may reasonably stipulate.  Campbells Corporate Services Limited proposes to act as the contact person for its Registered Fund clients and further particulars will be provided by us in due course on implementing this arrangement.

Alternatively, Legal Persons who may otherwise avail themselves of the Alternative Compliance Route may decide to opt in to the BOR and provide details of their RBOs to their CSP.

Obligations on Legal Persons that do not benefit from the Alternative Compliance Route

Such Legal Persons must:

• identify every RBO;
• give written notice to those individuals or entities which have been identified as RBO’s and to any individuals or entities whom the entity reasonably believes may be a RBO. That notice requires each addressee to respond within 30 days of receipt, confirming whether the individual or entity is a RBO and, if so, to confirm or correct any of the information required to be inserted in the BOR;
• establish and maintain an up to date beneficial ownership register which includes the RBOs of such Legal Person. The register must be kept at the Legal Person’s registered office and is typically maintained by the Legal Person’s CSP;
• where it becomes aware that there has been a ‘relevant change’[3] to the information contained in the BOR, give notice as soon as reasonably practicable (and no later than 30 days after it becomes aware of the relevant change) to the RBO requesting confirmation of the change;
• provide the required particulars of its RBOs which includes:
  • in respect of individuals:
    • name;
    • address;
    • date of birth;
    • nationality(ies);
    • information from their unexpired and valid passport, driver’s license or other government issued identification document;
    • the nature in which the individual owns or exercises control of the Legal Person;
    • the date on which the individual became (or ceased to be) a RBO;
  • in respect of RLEs:
    • name;
    • address of registered or principal office;
    • legal form and law by which it is governed;
    • the date on which the RLE became (or ceased to be) a RBO.

Statutory Offences and Penalties

The Act includes various offences and penalties and directors, managers, officers and partners of the Legal Person may also be liable to the same penalty as the Legal Person. The Competent Authority also has the power to impose administrative fines on any person who breaches the relevant provisions of the New BOR Legislation. The Competent Authority may strike an in-scope entity off the Register if an administrative fine remains unpaid for 90 days.

Public Accessibility

The Act provides that beneficial ownership information can only be made available to the public if and when regulations have been proposed by Cabinet and affirmed by a future resolution of Parliament. It is expected that there will be some limited access for persons with “legitimate interests” in due course and we will provide further information on this as and when available.

At present the major Cayman Islands authorities can access the centralised electronic platform established by the Competent Authority on which the registers of beneficial ownership are maintained.

The United Kingdom has entered into an agreement with the Government of the Cayman Islands for the sharing of beneficial ownership information.

Next Steps

Campbells can assist with all of these aspects.  Please do not hesitate to contact your usual Campbells contact if you have any questions or require any additional assistance.  As mentioned above, Campbells Corporate Services Limited will contact clients if the New BOR Legislation requires additional information or confirmations.

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In the recent judgment of Mark Eric Williams and Ors v Kuwait Ports Authority & Ors[1], the Cayman Islands Court of Appeal (“CICA”) confirmed that the Grand Court had jurisdiction to order the joinder of two plaintiff limited partners of The Port Fund L.P. (the “Fund”) as defendants to a crossclaim which had been filed against the general partner (the “GP”) of the Fund.

In reaching this decision, the CICA determined that the joinder did not contravene the statutory restrictions placed on limited partners pursuant to sections 14 and 33(1) of the Exempted Limited Partnership Act (2021 Revision) (the “ELP Act”), which respectively prohibit a limited partner from (i) taking part in the conduct of the business of the exempted limited partnership (“ELP”) and (ii) being a party to or named in legal proceedings against the ELP.[2]

This decision clarifies the rights and roles of limited partners in an ELP, particularly where limited partners have filed direct and derivative claims. This decision will therefore be of interest to private equity and other professionals and investors familiar with the widely-used Cayman ELP structure.

Background

The Fund is the subject of ongoing litigation in the Cayman Islands[3], and is the first Cayman Islands ELP in which limited partners have brought derivative claims pursuant to section 33(3) of the ELP Act. The relevant limited partners are two Kuwaiti state entities, the Kuwait Ports Authority and the Public Institution for Social Security (“KPA” and “PIFSS” respectively).

In February 2023, the independent directors of the GP resigned, leaving the GP without directors or officeholders, and with only illiquid assets. The GP is a party to various direct and derivative claims by and against limited partners in the Fund, and is also a defendant to crossclaims by codefendants, one of whom is the ultimate beneficial owner of the GP.

Following the resignation of the directors, KPA and PIFSS were purportedly concerned that the crossclaims against the GP may not be defended and that the success of such claims would impact upon their limited partnership interest in the Fund by diminishing the partnership assets. They accordingly sought to be joined as defendants to the crossclaim against the GP pursuant to O.15, r.6 of the Grand Court Rules, and also applied to have interim receivers appointed to the GP under section 11 of the Grand Court Act (2015 Revision).

The joinder application was opposed by the defendants who had brought the crossclaim against the GP on the basis that sections 14 and, in particular, 33(1) of the ELP Act prohibit a limited partner from (i) taking part in the conduct of the business of the ELP in its capacity as a limited partner, and (ii) being a party to or named in legal proceedings (save for the narrow exception provided in section 33(3) of the ELP Act allowing limited partners to bring a derivative claim where a general partner has, without cause, failed or refused to do so).

Section 33(1) states:

“Subject to subsection 33(3), legal proceedings by or against an exempted limited partnership may be instituted by or against any one or more of the general partners only, and a limited partner shall not be a party to or named in the proceedings.”

Section 14(1) provides:

“A limited partner shall not take part in the conduct of the business of an exempted limited partnership in its capacity as a limited partner”

The defendants contended that they were entitled to pursue their crossclaim against the GP alone, which was the sole proper defendant to the claim pursuant to both the ELP Act and the limited partnership agreement governing the Fund.

Grand Court decision

In a judgment delivered on 25 May 2023, the Grand Court of the Cayman Islands ordered the joinder of KPA and PIFSS, limited partners of the Fund, as defendants to the crossclaim, and appointed interim receivers over the GP to manage litigation related to the GP and the Fund.[4]

Justice Parker permitted KPA and PIFSS to be joined as defendants to the crossclaim in circumstances where they had earlier been permitted to bring derivative claims against the GP and the other defendants, and as limited partners had an indirect economic interest in the crossclaim. Specifically, Justice Parker concluded that section 33(1) did not prevent joinder of KPA and PIFSS as defendants to the crossclaim for the following reasons:[5]

• The proceedings, whether based on direct claims or derivative claims authorised under section 33(3), must also include any counterclaims or crossclaims within those proceedings, such that the crossclaim could not be regarded as a separate lis standing alone.
• The direct claims do not fall within section 33 of the ELP Act.
• It would be illogical and unfair if a limited partner permitted to pursue a derivative claim under section 33(3) were not also permitted to defend a counterclaim or a crossclaim in order that the derivative claim could proceed properly.

Justice Parker separately concluded that section 14(1) did not prevent the joinder because KPA and PIFSS sought to defend the crossclaim not as limited partners, but in their “individual capacities” as plaintiffs, and were not representing or replacing the GP. In this regard, Justice Parker held that “=[d]efending the crossclaim to protect their individual interest does not involve the Plaintiffs conducting the business of TPF”.

Justice Parker also held that the Court had a wide and flexible jurisdiction pursuant to GCR O.15, r.6 to permit joinder in the interests of justice when it was appropriate to do so. Justice Parker then exercised his discretion in favour of joinder, finding that, irrespective of the appointment of an officeholder, in circumstances where KPA and PIFSS were the parties most affected by the crossclaim and would bear the actual financial loss if it succeeded, it was just to permit those parties to participate in defending the crossclaim in addition to the GP acting by independent officeholders.

CICA decision

The appellants (being the defendants who brought the crossclaim against the GP) appealed the joinder order on two grounds:

1. The judge erred in law in finding that the Court had jurisdiction to make the said order notwithstanding section 33(1) and section 14 of the ELP Act.
2. The judge acted outside the margin of discretion afforded to him in ordering that KPA and PIFSS be joined as defendants to the said crossclaim notwithstanding his decision to appoint independent receivers with specific authority to conduct the litigation on behalf of the GP.

Section 33(1) and 14 of the ELP Act

The CICA agreed with Justice Parker’s conclusion that sections 14 or 33(1) of the ELP Act were not bars, in this case, to the respondents being joined as defendants to the crossclaim. However, the CICA disagreed with the judge’s reasoning and arrived at this conclusion for different reasons to the judge.

Importantly, while the CICA agreed that a limited partner does not need permission to defend a counterclaim arising within a proceeding which they have commenced themselves (either directly or derivatively having obtained permission pursuant to section 33(3)), this does not necessarily mean that limited partners have authority to defend a crossclaim.[6]

The CICA held that, contrary to Justice Parker’s view, crossclaims may constitute a separate lis such that the crossclaim may fall within the terms of section 33(1). Whether a crossclaim constitutes a separate lis depends on whether the crossclaim may properly be regarded as merely a facet of the existing litigation (in which case it will not fall within the terms of section 33(1)) or the promotion of a separate cause of action (in which case it will fall within the terms of section 33(1)).[7]

Having clarified the above, the CICA then addressed the statutory bar that section 33(1) imposes on limited partners should a crossclaim (or any other proceeding) fall within its terms. The CICA found that:[8]

• Section 33(1) is not an absolute prohibition on a limited partner playing any part in proceedings by or against an ELP. Those words need to be read in the context of the overall scheme of the ELP Act.
• Taken overall, the ELP Act is designed to provide a framework through which sleeping partners may invest with the protection of limited liability, all dealings with the outside world being conducted by the general partner.
• Viewed in that light, section 33(1) is to be regarded as merely a feature of the separation of functions between limited partners and general partners; it is designed to prevent a limited partner from being sued in respect of liabilities for which, under the scheme of the ELP Act, only the general partner is liable, and to reinforce the principle set out in section 14 that a limited partner should not take part in the conduct of the ELP’s business and its dealings with the outside world.

On this basis, the CICA found that the Court had jurisdiction to join the respondents to the crossclaim and dismissed this ground of appeal. The CICA further noted that such joinder was permitted because:[9]

• Once proceedings have been commenced in compliance with the provisions of section 33(1), they come under the control of the Court in the normal way and nothing in the terms of section (1) is intended to limit the ordinary powers of the Court, including the power to join parties under GCR O.15, r.6.
• The appellants had pleaded a defence of set-off specifically as a defence to the respondents’ claims, the effect of which was to place the merits of the crossclaim in issue between the appellants and respondents, as well as between the appellants and the GP. This means that, although standing alone the crossclaim may properly be regarded as a separate lis, the defence of set-off makes it a facet of the existing proceedings which is not be regarded as falling within section 33(1).

Exercise of discretion

The CICA found that the Judge acted within his discretion in ordering the joinder of KPA and PIFSS notwithstanding that receivers had been appointed.

The CICA noted that the Judge was aware that the appointment of receivers meant that there would be officeholders in place capable of dealing with some aspects of the litigation, having taken the view that no officeholder would be in as good a position as the respondents to defend the crossclaim, that the defence of the crossclaim by officeholders would have to be funded by the respondents or (which in the circumstances is unlikely) the appellants, and that it was the respondents who had the knowledge necessary to defend the crossclaim and the economic interest in doing so.[10]

Accordingly, it could not be said that the Judge took into account any irrelevant consideration, or failed to have regard to any relevant one, or that his decision was perverse. This ground was therefore dismissed.

Comment

The CICA’s judgment is of considerable importance to the Cayman Islands’ investment regime, in which ELPs are common structures, particularly for private equity funds. This is the first time that the CICA has considered the joinder of a limited partner as a defendant to a claim against a general partner. In doing so, the CICA has provided guidance on the role of limited partners within an ELP and the scheme of the ELP Act more generally.

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Exemptions

A BVI-registered company is exempt from filing an annual return if it meets any of the criteria listed below:

• It is listed on a stock exchange.
• It is regulated under a BVI financial services legislation and provides financial statements to the BVI Financial Services Commission per the requirements of that financial services legislation (i.e. BVI funds and licensees).
• It submits its financial statements and annual tax return to the BVI Inland Revenue Department.
• It is undergoing liquidation, with the provision that this exemption is not applicable if the annual return is due before the liquidation process commences.

Format and filing of the Annual Return

The annual return consists of a simple income statement and balance sheet and a copy of the prescribed form of the Annual Return is available here.  The BVI Financial Services Commission has confirmed that the form of annual return should not be adjusted or amended, save for non-material amendments.

There is no need for the annual return to be audited and there are no prescribed set of accounting policies or principles that must be adhered to.

The Annual Return is not publicly accessible and a BVI company’s registered agent is not required to submit the returns to any BVI regulatory body unless explicitly requested.

Filing Deadline

 BVI companies must file the Annual Return within 9 months of either the company’s calendar year or, if the company’s financial year is not a calendar year, the company’s financial year.

As an example, a company with a financial year end of 31 December will be required to file its first annual financial return no later than 30 September 2024 with respect to the financial period 1 January 2023 to 31 December 2023. 

If a company has a fiscal or financial year that does not correspond to a calendar year, its annual return becomes due in 2024, depending on the month in which the commencement of its financial year falls. Below are two examples:

• If a BVI-registered company has a financial year from 1 May 2023 to 30 April 2024, it must file its first annual return for the period ending 30 April 2024 between 1 May 2024 and 31 January 2025. The company must file every subsequent year before 31 January.
• If a BVI-registered company has a financial year from 1 July 2023 to 30 June 2024, it must file its first annual return for the period ending 30 June 2024 between 1 July 2024 and 31 March 2025. The company must file every subsequent year before 31 March.

Consequences for failure to file

If a BVI company misses its filing deadline, the registered agent must report this defect to the BVI Registry of Corporate Affairs (BVI Registry), or it will be liable to a fine of US$3,000. Once the defective notice is issued, the BVI company will be liable to fines (ranging from US$300 – US$5,000) and it may be struck-off and dissolved. Until the defect is remedied, the BVI Registry will not issue a certificate of good standing for the Company or allow it to make any filings.

Please note that the BVI Annual Financial Return is a requirement of the BVI Business Companies Act (as revised) and is separate to the BVI economic substance regime.

If you have any questions about the Annual Return, please email BVI-Financials@campbellslegal.com.

The post Deadline approaching to file the BVI Annual Financial Return appeared first on Campbells.

First, in Minsheng Vocational Education Company v Leed Education Holding Limited & Others[1], the Cayman Islands Court of Appeal (“CICA”) upheld the first instance decision by Segal J to grant an injunction pursuant to section 54 of the Arbitration Act 2012 (the “Act”) in support of foreign arbitral proceedings.

The factual background involved disputes over complex corporate lending and security interests, including a contested put option for the sale and purchase of shares in Leed International Education Group Inc. (a Cayman Islands company) and related share charges in favour of the Appellant.

These disputes gave rise to separate arbitral proceedings in Hong Kong and, later, in Beijing.  Whereas the Hong Kong arbitration concerned matters including the put option, the Beijing arbitration concerned rights and obligations under the loan agreements. The Beijing arbitration was conducted under the rules of the China International Economic and Trade Commission (“CIETAC”), as stipulated by the relevant loan agreements, whereas the share charges contained a non-exclusive jurisdiction clause in favour of the courts of the Cayman Islands.

At first instance, Segal J granted an injunction to restrain the Appellant from enforcing the share charges pending the outcome of the Beijing arbitration. The jurisdictional basis for the injunction was Section 54 of the Act, which provides that:

“(1)        A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their seat of arbitration is in the Islands, as it has in relation to the proceedings in court.

(2)          The court shall exercise those powers in accordance with its own procedures and in consideration of the specific principles of international arbitration.”

In the exercise of his discretion, Segal J had applied the well-established American Cyanamid principles. The order was made by Segal J before the tribunal in the Beijing arbitration was fully constituted, and evidence had been adduced by the Respondents to the effect that no such protective measures could, in any case, be granted by the tribunal in the Beijing arbitration. Segal J took account of those factors in his order, by requiring the Respondents to apply to the tribunal in the Beijing arbitration within five business days of its constitution for permission to continue to rely upon the interim injunctive remedies. The Respondents duly applied to the Beijing tribunal for such permission, however a decision upon that application remained pending.

On appeal to the CICA, the Appellant advanced four grounds of appeal against the first instance decision. For the reasons given in the leading judgment delivered by the Hon. Sir Anthony Smellie KC, the CICA unanimously dismissed the appeal and upheld the judgment of Segal J.

The first ground of appeal was that the Respondents were required to seek relief in either the Hong Kong or Beijing arbitrations, or from the supervisory courts at the seat of the arbitrations. In rejecting this argument, Smellie J.A. summarised the legal position as follows:[2]

• The jurisdiction of the Court to grant interim relief in aid of foreign arbitral proceedings is open textured and uncategorised in nature. The jurisdiction allows the issuance of interim measures in support of arbitrations taking place in other jurisdictions, as necessary to meet the needs of modern international arbitration practice.
• The Court has ancillary powers which must be exercised with caution – parties ought not be allowed to bypass the arbitral tribunal to seek interim measures from the Court merely because curial assistance is conceivably available. Accordingly, the powers are to be used only as needed for the purpose of assisting the foreign arbitral proceedings, without usurping the powers of the tribunal.
• There is no hard and fast requirement that a party must first apply to the arbitral tribunal itself or to a court in the seat of the arbitration for an interim measure, before applying under Section 54.
• If the option of applying to the arbitral tribunal or a court in the seat of the arbitration is available, the burden will be on the party applying to explain why it was not pursued, however the Section 54 powers may nonetheless be exercised in appropriate circumstances, such as in cases of urgency or where it is shown that the arbitral tribunal or foreign court (as the case might be) would not have the power to grant the interim measure or measures particularly needed;
• There must be a sufficient connection between the interim measures sought and the foreign arbitration they purport to assist.
• While an order under Section 54 could also be obtained as against a third party to arbitral proceedings, such an order is likely to be refused where the arbitral tribunal is already duly constituted and the application has either not been brought before it or has been refused by it or by a court in the seat of arbitration. Otherwise, an order against a third party is also a matter for the exercise of discretion by the Cayman Court as a foreign court pursuant to Section 54.
• As regards any presumptive obligation to first seek relief from an emergency arbitrator, it will be open to the claimant to decide whether to apply to the court (either in the seat or abroad as the circumstances might require) instead of “passing the baton” to an emergency arbitrator, if interim measures are required prior to the constitution of the arbitral tribunal, unless applicable binding rules provide to the contrary.

The Appellant’s second ground of appeal was that an injunction was unavailable because of the competing jurisdiction clause in the share charge documents. This ground of appeal failed because the jurisdiction clause in the share charges was non-exclusive and thus did not preclude another forum, including an arbitral forum, from having jurisdiction in respect of disputes arising in relation to the share charges. Furthermore, the parties had contractually agreed to resolve all disputes “relating to” the loan agreements by arbitration, thereby giving the tribunal jurisdiction to resolve them.

The Appellant’s third and fourth grounds of appeal concerned arguments that no preservation order could properly be made in the case, and that there could be no injunction to restrain enforcement of security. These grounds of appeal were also dismissed.

Consequently, the decision of the CICA in Minsheng represents a robust confirmation of the jurisdiction of the Cayman Islands courts to grant interim protective measures in support of foreign arbitral proceedings in appropriate cases.

The Grand Court of the Cayman Islands has also delivered three recent judgments concerning the enforcement of foreign arbitral awards pursuant to section 5 of the Foreign Arbitral Awards Enforcement Act (1997 Revision) (the “FAAEA”), as briefly summarised below.

In White Crystals Ltd v IGCF General Partner Limited[3] the Court dismissed an application by the general partner of a Cayman Islands exempted limited partnership to set aside an ex parte order that granted leave to enforce a foreign arbitral award pursuant to section 5 of the FAAEA.

The award concerned the rights of a limited partner to information and documentation from the general partner pursuant to statutory rights conferred on the limited partner by sections 22, 29, 30 and 31 of the Exempted Limited Partnership Act. The general partner had sought to impose conditions upon the provision of such information and documentation, ostensibly with the aim of preventing an anticipated breach of confidentiality obligations by the limited partner. However, the Court found that this line of argument was not supported by sufficient evidence and amounted to an attempt to re-litigate points raised before, and dismissed by, the arbitral tribunal. It thus provided no proper basis for the Court to overturn its ex parte decision to permit enforcement of the award.

Ramsay-Hale CJ concluded that “… public policy favoured the enforcement of an award which was made in defence of a statutory entitlement which had been dishonoured and to enforce a clear contractual obligation”[4] and that in any case “… this Court does not have jurisdiction to add a rider or addendum to an award … the Court’s jurisdiction is limited to enforcing an award or refusing to enforce it where any of the grounds in section 7 of FAAEA is established.”[5]

 In Mr Nasser Sulaiman H M Al-Haidar v Mr Jetty Venkata Uma Maheshwara Rao[6] the Court dismissed an application to set aside an ex parte order that granted leave to enforce a provisional foreign arbitral award pursuant to section 5 of the FAAEA, on the grounds that the arbitral tribunal lacked jurisdiction to make the provisional award. On the facts, the defendant had failed to raise a jurisdictional challenge before the arbitral tribunal before it issued the provisional award. Therefore, applying the doctrine of Henderson v Henderson (viz. a party to litigation cannot later raise an argument that was available to it at an earlier stage of proceedings), it was not open to the defendant to challenge enforcement of the provisional award.

Finally, in Carrefour Nederland B.V. v Uning International Group Co. Limited & another[7] the Court likewise dismissed an application to set aside an ex parte order that granted leave to enforce a foreign arbitral award pursuant to section 5 of the FAAEA on various technical grounds, including procedural points concerning service. The Court also refused a stay of enforcement, noting that any subsequent attempts to execute the order would come before the Court in the usual way. Kawaley J concluded that “…[w]hatever residual inherent jurisdiction the Court may have to adjourn enforcement proceedings on case management grounds, such jurisdiction does not extend so far as granting relief which is a thinly-veiled form of refusing to enforce an unimpeached foreign award on grounds which contravene the express terms of an Act of Parliament.”[8]

These decisions confirm that the Cayman Islands courts take a firm pro-arbitration stance in ensuring that foreign arbitral awards are enforceable in the Cayman Islands subject only to narrow statutory exceptions.

The post Arbitration rising: Four recent judgments of the Cayman Courts appeared first on Campbells.

Background

The Company’s liquidation commenced in June 2021. Shortly thereafter, a dispute arose with the defendant parties (the “Defendants”) regarding the ownership of the Funds, which are held and controlled by the Defendants. Amongst other things, the Company asserts a proprietary claim to the Funds, and claims that the Defendants are holding all of the Funds on trust for it. Although the Defendants were aware of the Company’s position from early on in the Company’s liquidation, they continued to use the Funds to pay legal fees, directors’ fees and various other contested expenses allegedly paid “in the ordinary course of business”. As a result of the same, and in light of the rate at which the Funds were being expended, the Company issued an application for a proprietary injunction, seeking an order that the Funds (or what was left of them) be paid into Court or escrow, pending the resolution of the dispute between the parties.

The Judgment

In his Judgment, Mr Justice Parker considered: (i) whether the Court had jurisdiction to make an order pursuant to O.29, r.2(1) and/or r. 2(3) of the Grand Court Rules (2023 Revision) (the “GCR”); and, if so, (ii) whether such an order should be made.

Jurisdiction

The Court’s jurisdiction to make an order in relation to the detention, custody or preservation of any property is set out in GCR O.29, r2(1) and/or r.2(3), as follows:

GCR, O.29, r.2(1): “On the application of any party to a cause or matter the Court may make an order for the detention, custody or preservation of any property which is the subject matter of the cause or matter, or as to which any question may arise therein, or for the inspection of any such property in the possession of a party to the cause or matter.” (Emphasis added.)

GCR, Order 29, r.2(3): “Where the right of any party to a specific fund is in dispute in a cause or matter, the Court may, on the application of a party to the cause or matter, order the fund to be paid into Court or otherwise secured.” (Emphasis added.)

The Defendants argued that, in any event, there was no jurisdiction to grant the relief sought on the Company’s application because there was “no property” or “no specified fund” over which any proprietary injunction could be granted. It was argued that monies in a bank account are a choses in action, which do not fall within the definition of “property”, and that to be a “specified fund”, the monies would have to be ring-fenced in an account, in order to be identifiable. The Defendants also argued that there had been intermingling of funds in the relevant bank accounts.

Mr Justice Parker found that, although each case turns on its specific facts, the Court does in principle have jurisdiction to make orders for the preservation of monies held in bank accounts, and that where monies derived from a fiduciary relationship remain in a bank account and can be identified, they fall within GCR O.29, r.2(1). In relation to the definition of “a specific fund” (GCR O.29, r.2(3)), the Judge drew a distinction between money which is the subject of a claim in debt or damages, and money in respect of which there is a claim to beneficial ownership. The Court found that, in the present case, the claim was for property in the form of identifiable and distinct funds in respect of which the Company claims beneficial interest, under GCR o.29, r.2(3).

The Court found insufficient evidence for intermingling, and found that (even if there had been intermingling) the Defendants would, on the Company’s hypothesis/basis for its claim, have been under an obligation to keep the Funds separated for the benefit of the Company. Any intermingling, it found, would have been in breach of that obligation.

In the circumstances, the Court found that it had jurisdiction to grant the relief sought.

Relief

Mr Justice Parker identified the test for granting a proprietary injunction, requiring the Company to show that there is a serious issue to be tried (a “real, as opposed to a fanciful, prospect of success on the claim”). Upon consideration of the pleaded case, and the evidence in support filed by the Company, he found that the Company has a real prospect of success at trial, and that the Company had tendered a plausible factual and legal basis for its claims. The threshold test was therefore met.

In relation to the balance of convenience test, the Court weighed the prejudice to the Company in light of the Defendants’ clear intention to continue to use the Funds (if not restrained), versus the prejudice to the Defendants in terms of their reliance on the Funds to properly advance their case in the proceedings and for the payment of the First Defendant’s personal expenses. Although Mr Justice Parker noted the First Defendant’s sworn statement that the Funds would only be spent on alleged ordinary business expenses, the Court formed the view on the evidence that the Funds were being disbursed at such a rate that a proprietary order was appropriate. In the circumstances, and having regard to the potential prejudice to the Company if ultimately successful at trial, the Court found it just and convenient to grant the relief sought by the Company.

Cross-Undertaking in Damages

Parker J’s decision is of particular interest for the analysis of the law relating to the requirement for a cross-undertaking in damages and for the Judge’s decision, in all the circumstances of this case, that an unlimited cross-undertaking in damages would not be required. Parker J decided – having considered, among other authorities, Lewison J’s decision in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev (CA) [2016] 1 WLR – that the justice of the case, in all the circumstances, meant that the JOLs need only offer a cross-undertaking limited to the value of the unencumbered assets of the Company’s estate which remain at the end of the proceedings.

A copy of the Judgment is available here: Judgment – Ascentra Holdings, Inc v Ryunosuke Yoshida et al- FSD 300 of 2023 (RPJ).

Comment

The Judgment provides welcome guidance on the Court’s approach to proprietary injunctions and the matters that will be considered by the Court in relation to such applications. In particular, it provides helpful analysis of the law relating to the requirements for a cross-undertaking in damages, and confirmation that, depending on the claim and the factual circumstances of a case, relief pursuant to GCR O.29, r.2(1) and/or r.2(3) can be granted over funds in a bank account in order to preserve those funds pending the resolution of a proprietary dispute relating to them.

If you have any queries about the matters raised in this note, please do not hesitate to contact the authors.

Campbells LLP acts as Cayman Islands counsel for the Company and for its Joint Official Liquidators, Graham Robinson and Ivy Chua Suk Lin.

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