Legal Updates

In a comprehensive judgment released by the Financial Services Division of the Grand Court of the Cayman Islands, Mr Justice Segal rejected an application to strike out a just and equitable winding up petition brought by IGCF SPV 21 Limited (the Petitioner) in respect of a Cayman Islands entity – KES Power Limited (KESP) – in which the Petitioner is a shareholder. The strike-out application was brought by two other shareholders (Al Jomaih Power Limited and Denham Investment Ltd) who contended that the petition had been presented in breach of a shareholders’ agreement (the SHA) to which they were a party and in breach of section 95(2) of the Companies Act (the Act).

Conal Keane and Niall Dodd of Dillon Eustace, led by Graham Chapman KC of 4 New Square Chambers, acted for the successful respondent to the strike-out application, IGCF SPV 21 Limited.

Section 95(2) of the Act provides that the Court shall dismiss a winding up petition where the petitioner is contractually bound not to present it.

The Court was of the view that the application centered around a discrete matter of contractual construction, namely how the specific wording of schedule 4 of the SHA was to be interpreted. In making its finding, the Court applied the approach to interpretation taken in an established line of authorities, as summarised in the decisions in Rainy Sky and Lamesa.

The Court, applying those principles of construction, stated that the relevant wording of schedule 4 needed to be considered and interpreted in light of:

1. the natural and ordinary meaning of the language used;
2. the other provisions of the SHA;
3. the terms of, and wording in, the company’s Articles (with the terms of the SHA prevailing over the Articles in the event of a conflict between the two); and
4. the overall commercial purpose of the Schedule 4 wording in the context of the SHA as a whole and that of the Articles.

The Court accepted the Petitioner’s arguments that on the proper construction of schedule 4 and the definitions set out in the SHA, particularly with regard to “liquidation”, the Petitioner had not agreed that it would not present a winding-up petition. The Court’s view was that (1) the schedule 4 covenant was a provision relating to corporate governance and the regulation of the powers given to the shareholders by the SHA and the Articles and (2) this construction fitted with a reasonable and realistic understanding of the purpose of the covenant. It was not, in the Court’s view, intended that shareholders would be deprived of their statutory right to apply to court for a winding up order in circumstances of equitable wrongdoing justifying a winding up on the just and equitable ground. A covenant prohibiting the presentation of a winding up petition on just and equitable grounds would need to be clearly and explicitly expressed.

As a general point, strike out applications have become relatively common in the Grand Court. Order 18, Rule 19 of the Grand Court Rules provides that the court may, at any stage of proceedings, make an order striking out any pleading or anything in the endorsement of any writ in the action, on the ground that:

1. It discloses no reasonable cause of action or defence, as the case may be; or
2. It is scandalous, frivolous or vexatious; or
3. It may prejudice, embarrass or delay the fair trial of the action; or
4. It is otherwise an abuse of the process of the court.

The majority of strike out applications in recent years have been unsuccessful before the Grand Court. Whether to file a strike-out application is a difficult tactical decision. In some cases, there may be cogent commercial reasons for the application and / or it may be intended to send an early message to one’s opponents that a robust approach to the defence of the proceedings will be adopted as part of a wider litigation strategy. A successful strike-out application can stop a case in its tracks. The converse, however, is that losing a strike-out application will likely lead to an adverse costs order and may affect the way the in which the Court views the proceedings as a whole.

If you have any further queries on this subject or wider Cayman litigation matters, please reach out to Conal or Niall.