"Nuclear Option" – Cayman Islands Court refuses to press the PL appointment button
In the Matter of Position Mobile Ltd SEZC, the Cayman Islands Court re-affirmed the availability but draconian nature of the appointment of a provisional liquidator and the consequent heavy burden on the applicant to demonstrate that the appointment of a PL is necessary.
By section 104(2) of the Companies Act, a creditor, contributory or the CIMA may apply for the appointment of a PL on the grounds that: (a) there is a prima facie case for a winding up order; and (b) the appointment of a PL is necessary to prevent the dissipation or misuse of company assets, prevent the oppression of minority shareholders, or to prevent mismanagement by the company’s directors.
Given that the appointment of a PL is frequently terminal and ousts management pending the winding up hearing, the appointment of a PL requires the most anxious consideration (Rimer LJ in Revenue and Customs Commissioners v Rochdale Drinks Distributors Ltd).
In line with the anxious approach, Justice Doyle was not persuaded on the evidence to exercise his discretion to press the nuclear button and appoint a PL. The judgment summarises the law in the Cayman Islands and the key findings are:
- There are four main hurdles that an applicant must jump:
- The presentation of the winding-up hurdle
- The standing hurdle
- The prima facie case hurdle
- The necessity hurdle
- Given the consequences, there is a heavy burden on applicants and clear and strong evidence is required
- Notice should be given to the respondent unless exceptional circumstances apply
- If a lesser remedy can protect the applicant, then a PL should not be appointed
- A prima facie case is established if the allegations are supported by evidence and have not been disproved
- The applicant must prove the appointment is necessary and the Court will decide on the evidence before it
- Whilst prior mismanagement is relevant, the Court is concerned with future mismanagement
- The power to appoint a PL is discretionary and each case will be determined by its own facts and circumstances
Economic downturns have traditionally led to an increase in fraudulent activity. Given the current macro-economic climate and global uncertainty, this is a timely reminder that a PL will be appointed in the Cayman Islands, in the appropriate circumstances. The suspicion and/or discovery of fraud by stakeholders necessitates immediate and urgent action to ensure that their interests are adequately protected pending the determination of the underlying dispute. The appointment of a PL is a key tool in the armoury of creditors or shareholders if it is deployed in appropriate circumstances and where the applicant can satisfy the heavy burden of necessity.