Banco Economico v Allied Leasing

• Jurisdiction: Cayman Islands
• Judge: (Graham, J.)
• Judgment Date: 23 October 1998
• Court: Grand Court (Cayman Islands)
• Date: 23 October 1998

Grand Court

(Graham, J.)

BANCO ECONOMICO S.A.

and

ALLIED LEASING AND FINANCE CORPORATION

R.H. Hildyard, Q.C., G.A. Locke and Ms. S.J. Collins for the petitioner;

J. Martin, Q.C., T. Lowe and Ms. L. DaCosta for the respondent;

S. Hall-Jones, Senior Crown Counsel, for the Monetary Authority.

Cases cited:

(1) Alipour v. AryWLR, [1997] 1 W.L.R. 534; sub nom. Re U.O.C. Corp., Alipour v. Ary, [1997] BCC 377, applied.

(2) Claybridge Shipping Co. S.A., Re, [1997] 1 BCLC 572; [1981] Com. L.R. 107n, dicta of Lord Denning, M.R. applied.

(3) Company (No. 0012209 of 1991), In re a, [1992] 1 W.L.R. 351, considered.

(4) Company (No. 004055 of 1991), In re a, [1991] 1 W.L.R. 1003; sub nom. Re Record Tennis Centres Ltd., [1991] BCC 509.

(5) Company (No. 006685 of 1996), In re a, UNK[1997] BCC 830, dicta of Chadwick J. applied.

(6) Cornhill Ins. PLC v. Improvement Servs. Ltd., [1986] 1 W.L.R. 114; (1986), 2 BCC 98, 943, considered.

(7) Delaine Pty. Ltd. v. Quarto Publ. PLC(1990), 3 A.C.S.R. 81; 8 A.C.L.C. 1026.

(8) Foulds (R.A.) Ltd., ReUNK(1986), 2 BCC 99, 269, considered.

(9) H. (Minors) (Sexual abuse: Standard of proof), In re, [1996] A.C. 563; [1996] 1 All E.R. 1, observations of Lord Nicholls of Birkenhead applied.

(10) Mann v. Goldstein, [1968] 1 W.L.R. 1091; [1968] 2 All E.R. 769, applied.

(11) Medi Servs. Intl. Pty. Ltd. v. Jarson Pty. Ltd.(1978), 3 A.C.L.R. 518, not followed.

(12) Russian & English Bank, In re, [1932] Ch. 663; (1932) 101 L.J. Ch. 226.

(13) Tay Bok Choon v. Tahansan Sdn. Bdh., [1987] 1 W.L.R. 413; [1987] BCLC 472, dicta of Lord Templeman applied.

(14) -Welsh Brick Indus. Ltd., Re, [1946] 2 All E.R. 197; (1946), 90 Sol. Jo. 430, considered.

Legislation construed:

Companies Law (1995 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 1995), s.93:

‘A company may be wound up by the Court if-

. . .

(c) the company is unable to pay its debts. . .’

s.95: ‘Any application to the Court for the winding up of a company shall be by petition which may be presented by . . . any one or more than one creditor . . . of the company. . . .’

Companies-compulsory winding up-grounds for winding up-inability to pay debts-no petition on basis of disputed debt and petitioner has no locus standi as creditor under Companies Law (1995 Revision), s.95-court may recognize locus standi if petitioner has good arguable case as creditor and otherwise left without effective remedy

Companies-compulsory winding up-grounds for winding up-inability to pay debts-burden on debtor company to show debt disputed on substantial grounds-cogency of evidence required depends on nature of defence-court may hear oral evidence and draw adverse inferences against debtor tendering no witnesses and declining to cross-examine petitioner”s witnesses

The petitioner applied for an order for the winding up of the respondent company.

The petitioner, a Brazilian bank, itself in liquidation, alleged that the respondent, a Cayman company, was indebted to it in respect of securities beneficially owned by the bank, promissory notes issued by the company, a secured loan linked to the lease of the bank”s premises, an unsecured loan and an overdraft facility. The petitioner”s affidavits in support initially contained specific allegations of fraud against the respondent”s directors which were not ultimately relied on.

The company opposed the petition, initially on the basis that its assets were held on behalf of the bank but that their value exceeded the debts alleged, and then on the grounds that there existed a bona fide and substantial defence to the matters pleaded in the petition. In earlier proceedings, the Grand Court (Smellie, J.) made a recommendation that the calling of oral evidence and the availability of the respondent”s witnesses for cross-examination would be desirable for the proper presentation of its defence.

The petitioner submitted that (a) it was a creditor within the meaning of s.95 of the Companies Law (1995 Revision), and therefore entitled to petition for the respondent”s winding up; (b) an order should be made unless the respondent could satisfy the court that the debt was disputed on the grounds of a defence which was both bona fide and substantial; (c) the respondent”s assertions in its affidavits as to the financial arrangements between the parties were so improbable as to require considerable cogent evidence in support, which the respondent had declined to adduce by refusing to tender its witnesses; (d) the respondent had admitted the debt by its attorneys, and its current opposition to the petition was a mere

device to avoid the political consequences in Brazil of factual findings of fraud against its directors by the Grand Court; and (e) since the respondent was insolvent, was no longer trading and would never again do so, the court could still exercise its discretion under s.93 to order that the company be wound up even if it found a bona fide and substantial dispute as to the debt, so that the petitioner would not be left without a remedy.

The respondent submitted that (a) the petitioner was not a creditor under s.95 of the Companies Law (1995 Revision) and therefore had no locus standi to bring a petition for its winding up; (b) the petition was an abuse of the court”s process, since the debt was disputed on bona fide and substantial grounds, and it was for the petitioner to prove otherwise on the balance of probabilities; (c) since a winding-up petition should be heard on affidavit evidence alone, and did not require oral evidence to be given or discovery to be made, the allegations of dishonesty against it, which were inherent in the petitioner”s evidence, should be presented in the form of a writ action; (d) the company”s defence was contained in the affidavit evidence of its directors and an investment agreement between the parties under which the petitioner had agreed to accept the face value of securities purchased by the respondent with the aid of loans from it as full repayment of the respondent”s debts; and (e) accordingly, it was not ‘unable to pay its debts’ for the purpose of s.93.

Held, ordering that the company be wound up:

(1) The bank was required to show on the balance of probabilities that it had locus standi to petition as a creditor for the winding up of the company under s.95 of the Companies Law (1995 Revision) and that the respondent was unable to pay its debts. Since the court would ordinarily dismiss as an abuse of process a petition based on a debt which was disputed on substantial grounds, a petitioner could not establish its locus standi as a creditor if there was such a dispute. However, these were rules of procedure rather than law, and even if the petitioner”s locus standi were challenged as it was here, the court, having given appropriate rulings as to the nature of the issues to be resolved, could hear the petition if the petitioner had a good arguable case that it was a creditor and would otherwise be left without an effective remedy (page 297, lines 32–36; page 298, line 40 – page 299, line 2; page 301, line 41 – page 302, line 29; page 303, lines 11–38; page 305, lines 8–17; page 305, line 35 – page 306, line 13).

(2) The onus of establishing that the debt was disputed on substantial grounds lay with the respondent, and the cogency of the evidence required to discharge this burden depended on the nature of the defence to the allegations in the petition. Whilst affidavit evidence was in practice often sufficient for this purpose, the court would set its own procedure and oral evidence could be tendered and witnesses cross-examined. The court would not make findings as to the commission of offences or the existence of dishonesty, but would make any findings of fact which were appropriate to the determination of the issues raised in the petition (page 304, lines 3–19).

(3) The petitioner in this case had established its locus standi under s.95 and the respondent had failed to show substantial grounds for opposing the petition. On the affidavit evidence presented by the respondent, the investment agreement which purported to explain the financial arrangements between the parties was a fiction designed to stall the winding-up process. The respondent, despite numerous opportunities to request discovery from the petitioner and to call witnesses and cross-examine those of the petitioner, declined to do so, from which the court concluded that it was aware that all relevant documents had been disclosed and that its defence would not stand up to scrutiny. Furthermore, since the debt had been admitted in correspondence by the respondent”s attorney as its lawful agent, this cast doubt on the existence of a bona fide dispute. The court would exercise its discretion to wind up the respondent company, since further delay might jeopardize the liquidators” ability to recover its assets (page 299, lines 39–44; page 301, lines 20–33; page 304, line 39 – page 305, line 7; page 307, line 36 – page 308, line 20; page 309, lines 10–15; page 309, line 38 – page 310, line 7; lines 41–45; page 311, lines 29–31; page 312, lines 14–20).

GRAHAM, J.: On September 28th, 1998, after a hearing lasting 11
days, I made an order that Allied Leasing & Finance Corporation, the
respondent, be wound up by the court subject to the provisions of the
20	Companies Law (1995 Revision). I ordered that joint liquidators be
appointed and authorized them to do any acts or things considered by
them to be necessary or desirable in connection with the liquidation of the
company and the winding up of its affairs.
I made other consequential orders, the precise details of which I shall
25	set out at the end of this judgment. I informed the parties that I would, in
due course, deliver written reasons for my decision, the winding up
having been opposed by counsel for the respondent on a series of stated

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