Cayman Court’s approach to a shareholder’s winding up petition which is in substance a dispute between shareholders
In the recent decision In the Matter of Madera Technology Fund (CI) Ltd, the Cayman Islands Grand Court considered the Court’s power to order the joinder of shareholders to a shareholder’s winding-up petition and characterise the proceedings as an inter partes proceeding between shareholders of the company.
Madera Technology is an exempted limited company incorporated in the Cayman Islands and operates as a feeder fund. The Petitioner is a registered shareholder holding approximately 29.5 per cent shares in the company. At all material times, the company had two directors. Due to the deterioration of the relationship between the directors and the beneficial owner of the Petitioner, the directors caused the company to seek to compulsorily redeem the Petitioner’s shares in exercise of a power under the company’s memorandum and articles of association. Subsequent to the issue of the compulsory redemption notice, the company converted the Petitioner’s shares from voting shares to non-voting shares.
In those circumstances, the Petitioner petitioned to wind up the company on just and equitable grounds. The Petitioner alleged that the company converted its shares and sought to compulsorily redeem its shares for an improper purpose, and that the Petitioner had suffered a justifiable loss of faith in the company’s management. The Petitioner also sought to join the two directors, who also hold a small portion of the shares in the company, as respondents, and an order that the proceeding be treated as inter partes proceedings.
O.3 r. 12 of the Companies Winding Up Rules (CWR) provides that on the hearing of the summons for directions, the Court may give directions that the proceedings be treated an inter partes proceeding between one or more members of the company as petitioner and the other member or members of the company as respondents. The Court considered that CWR O.3 r.12 required the Court to make a choice between the company or shareholders as respondents. If the shareholders are the respondents, the company should not actively participate in the proceeding. This is because of the general principle that the funds of the company should not be spent on litigation where real dispute is between shareholders.
As to the issue of jurisdiction, the Court held that the fact that the directors are shareholders provided a jurisdictional gateway for the application of CWR O.3 r.12. As to the issue of discretion, the Court held that the correct approach is to look to the real essence of the dispute, and consider whether the company has a separate and independent position in the dispute and whether it is necessary or expedient in the interests of the company as a whole that the company should participate in the proceeding.
In this case, the Court found that there was nothing to suggest that this was a dispute between shareholders - there was no allegation against the two directors as to their activities qua shareholders as distinct from qua directors, and their shareholding was incidental to the alleged activities and was neither of the essence of nor central to and did not feature in it. Accordingly, the Court held that this was not an appropriate case in which it should exercise its discretion to order joinder of the two directors as respondents or order that the petition be treated as one between shareholders.
This decision clarifies the Court’s approach in exercising its powers under CWR O.3 r.12, and provides a clear guidance as to the circumstances in which the Court may order a shareholder’s winding up petition to continue as an inter partes proceeding between the shareholders.