Cayman Court extends protection to those who invest through nominees
In the recent decision of Re Asia Momentum Fund (SPC) Ltd. (In Voluntary Liquidation), the Grand Court of the Cayman Islands considered whether a former beneficial shareholder of a Cayman Islands company had standing to petition for the company’s winding up where its shares had been redeemed but the company had failed to pay out the proceeds of redemption.
In Re Asia Momentum is the most recent in a series of decisions that considers the interaction between the Cayman Islands statutory framework for the winding up of companies and the common form of commercial arrangement whereby an institutional nominee holds legal title to shares on behalf of a beneficial owner.
Earlier decisions explore the difficulties that these commercial nominee arrangements give rise to when the beneficial owner wishes to bring legal action in respect of the shares. The underlying cause of these difficulties is that the Cayman Islands Companies Act provides standing to seek the winding up of a company to the person named in the company’s register of shareholders, and institutional nominees are typically unwilling to commence legal action as part of a standard commercial nominee arrangement. Further, the articles of association of a Cayman Islands company usually provide that the company need only recognise the legal owner of the company’s shares and not anyone else who may have some other interest in them. The options available to a beneficial shareholder in these circumstances are not straight forward, but a winding up petition brought by a beneficial shareholder will almost certainly be struck out because of lack of standing.
The circumstances in Asia Momentum were novel. The company had redeemed the shares but failed to pay out the redemption proceeds. Post redemption, the nominee was no longer a shareholder but was a creditor of the company in respect of the unpaid redemption proceeds. The former beneficial shareholder petitioned for the winding up of the company, and the Court agreed that it could do so. This is because, on a construction of the relevant nominee agreement, the former beneficial shareholder was an equitable assignee of its nominee, and was therefore a contingent creditor in respect of any creditor claim of its nominee.
While the circumstances considered by the Grand Court in Asia Momentum were unusual, the decision does helpfully illuminate a pathway available to beneficial shareholders who wish to take action in respect of claims held through a reluctant institutional nominee.