The Cayman Islands Court of Appeal delivered a significant judgment earlier this month on validation orders pursuant to section 99 of the Companies Law in Tianrui (International) Holdings Company Limited v China Shanshui Cement Group Limited (unreported, 18 February 2020).
Section 99 renders void, absent a court order, dispositions of a company’s property or transfers of its shares that take place between presentation of a winding up petition and the making of an order for the company’s winding up. The Court may make an order validating a disposition or share transfer.
The Court of Appeal’s judgment is significant because it rejects the approach that evolved through a series of Grand Court decisions that draws principled distinctions between solvent and insolvent companies and company transactions within and outside of the ordinary course of business. These distinctions had the practical effect of making it easier to obtain a validation order in some circumstances, and shifting the burden of proof onto those challenging the application for such an order rather than those seeking it.
The Court of Appeal held that the fundamental purpose of section 99 is to maintain the company’s status quo pending resolution of the winding up petition and, in relation to share transfers, rejected the previously widely accepted rationale that the objective of the section was to prevent holders of partly paid shares transferring them to those unable to pay the balance owing.
The Court of Appeal’s judgment is of particular significance in the Cayman context because the key remedy for minority shareholder oppression is the just and equitable winding up. The Court of Appeal rejected the presumption that appears to have developed in favour of validating transactions proposed by the company (acting through its majority shareholder appointed directors) merely because the company was solvent. The Court of Appeal held that, regardless of solvency, the court’s task is to ensure that the proposed transaction is consistent with the purpose of section 99 and for the benefit of the company and those interested in the value of its assets.
The decision is also significant for the one thousand or so Cayman Islands companies listed on the Hong Kong Stock Exchange. Legal title to shares in those entities is typically held on behalf of their beneficial owners by the Hong Kong Securities Clearly Company Nominees Limited to facilitate the trading of those shares through the Central Clearing and Settlement System. In Tianrui, the Court of Appeal appeared to accept expert evidence that, by operation of Hong Kong’s Securities and Futures Ordinance, share transfers conducted through CCASS could not subsequently be unwound by a liquidator.