Protecting Cayman Islands Companies at Risk: Provisional Liquidation
The appointment of provisional liquidators over a company is a powerful weapon in the armoury of the Cayman Islands Courts to protect a company at risk. If appointed, professional insolvency practitioners will take control of the company pending the hearing of a petition to wind up the company. But it is a weapon that may have serious adverse consequences for a company, both as to its commercial operations and business reputation. For this reason, the requirements for, and the circumstances in which, such an appointment may be made are closely circumscribed by the Cayman legislation and case law.
The process has come under scrutiny in two recent decisions of the Grand Court – Re ICG I (unreported, 4 August 2021) and Re Al Najah Education Ltd (unreported, 9 August 2021) – both of which refused the appointments and emphasized that the Court will only make such an appointment after the most careful consideration.
S104(2) provides that an appointment may only be made:
- after a petition to wind up the company has been presented, and before it is heard;
- if the applicant is a creditor or member of the company (and in certain circumstances, the Cayman Islands Monetary Authority);
- if there is a prima facie case for making a winding up order; and
- the appointment is necessary to prevent (i) the dissipation of company assets, (ii) oppression of minority shareholders and/or (iii) mismanagement or misconduct on the part of the directors of the company.
A prima facie case means that the applicant must demonstrate that it is likely that a winding up order will be made. Dissipation means a serious risk that company assets may not continue to be available for the company. Mismanagement or misconduct means culpable behaviour involving a breach of duty or improper behaviour that involves a breach of the company’s governing documents or governance regime.
The Court will exercise its discretion to cause the least irremediable prejudice to the parties. The Court is acutely aware that an appointment is a very serious step, and imposes a heavy burden on those seeking an appointment. Failure in the application is very likely to lead to the applicant being ordered to pay the costs of the application, which, it was said by the Judge in Re ICG I (unreported, 10 August 2021) should focus the minds of those thinking of making such an application and also the minds of those advising such a person.
These recent cases show the hurdles facing an application under s104(2), and the need for very careful consideration before making it.