China Cvs (Cayman Islands) Holding Corporation

• Jurisdiction: Cayman Islands
• Judge: (Rix, Martin and Moses, JJ.A.)
• Judgment Date: 23 April 2020
• Court: Court of Appeal (Cayman Islands)

IN THE MATTER OF CHINA CVS (CAYMAN ISLANDS) HOLDING CORPORATION

FAMILYMART CHINA HOLDING COMPANY LIMITED

and

TING CHUAN (CAYMAN ISLANDS) HOLDING CORPORATION

(Rix, Martin and Moses, JJ.A.)

Court of Appeal (Cayman Islands)

Companies — compulsory winding up — stay of petition — where relation-ship between company’s shareholders governed by agreement containing arbitration clause, minority shareholder’s petition for winding up on just and equitable ground not stayed — court has exclusive jurisdiction under Companies Law (2018 Revision), s.92(e) to decide whether company should be wound up on just and equitable basis

Held, dismissing Ting Chuan’s appeal and allowing FMCH’s appeal:

The strike out appeal

(1) Ting Chuan’s appeal against the Grand Court’s refusal to strike out the petition would be dismissed. The judge was wrong to criticize the way the petition was drafted and wrong to strike out those parts of the petition which referred to the understanding. The judge had focused on the allegations in the petition against the majority shareholders that they had procured breaches by the directors whom they had appointed. That led to a striking omission of any reference to the pleas which preceded the allegations against those shareholders. The judge made no reference to the specific paragraphs alleging breaches of the duties owed by the majority directors themselves (in relation to undisclosed related parties) nor to the allegation that the loss of trust and confidence in the conduct and management of the company’s affairs had been justified by the “persistent and repeated breaches of duty over extended periods of time by the majority directors.” The judge appeared to have thought that he needed to identify a cause of action the breach of which would form the basis of thewinding up, which betrayed a significant misunderstanding and mis-characterization of the petition and its two bases. Neither of the two bases were a cause of action but rather a description of the foundations on which the petition relied in support of the assertion that the company should be wound up, namely loss of confidence on the ground of lack of probity and a breakdown in the fundamental relationship between the main share-holders. The judge’s failure to make any reference to the allegations of lack of probity on the part of the majority directors demonstrated that he overlooked that fundamental ground for the just and equitable winding up of the company. The judge made no reference to the relevant paragraphs of the petition which amply set out that the winding up was sought on the basis of the majority directors’ breaches of obligations of full and frank advance disclosure and their failure to observe the rules against conflict, profit and self-dealing. There was no justification for criticizing those pleadings as inadequate or requiring, at the stage of presentation of the petition, further particularity. The search for a cause of action also led the judge to misunderstand and mischaracterize the references to the understanding. In the judge’s view it was alleged that the majority shareholders had broken some form of contractual obligation but that was not what the petition alleged. The references to the understanding which operated until 2012 explained and highlighted by way of contrast the absence of disclosure in the period which followed. The references to the understanding also formed the basis for the second ground on which the petition was brought: the breakdown in trust and confidence. The judge erred in regarding the allegations against the majority shareholders as “crucial” or in describing the drafting as being an attempt to sidestep the effect of the arbitration agreement within the SHA. The allegations against the majority shareholders followed and were dependent on the “crucial” allegations made against the directors for breaches of their obligations and founded the assertions of loss of confidence and breakdown of trust on which the petition depended (paras. 49–57; para. 64).

(2) None of Ting Chuan’s submissions justified striking out the petition. Regulations in the articles of association did not modify the fundamental obligations of a director in relation to disclosure and self-dealing. Ting Chuan invited the court to assess the weight of the evidence and pointed out that it was the executive management of the operating subsidiaries which conducted the business. However, the petition sufficiently pleaded that the 100% owned subsidiaries were managed by the company’s management, not by their own directors. The conduct of the affairs of a subsidiary was a proper basis of complaint against a parent. The management and affairs of a company included the management and affairs of its wholly owned subsidiaries over which it had control. Ting Chuan also made submissions inter alia as to the unlikelihood of FMCH being unaware of the relationship between those companies and the subsidiaries and the lack of any reason or motive behind any possible concealment, particularly in respect of the very small proportion of transaction amounts attributable to the only two allegedly undisclosed companies trading withthe subsidiaries (Shanghai Huanxuan and Shanghai Xianyicai). None of the submissions came anywhere near justifying striking out the petition. There was no basis for consideration of the appeals other than on the basis that the facts asserted were true. Whether the evidence was accurate and whether it justified winding up on the just and equitable ground was a matter for the hearing of the petition, subject to the question of arbitration (paras. 58–63).

The stay appeal

(3) A decision whether to wind up a company was a matter for the exclusive jurisdiction of the court. Under s.92 of the Companies Law, the court’s consideration of whether it was just and equitable that a company should be wound up was a threshold question, it was not a question of relief. It was only once the court decided that it was just and equitable to wind up a company that it could then determine whether a winding up order should be made or whether one of the specified alternatives under s.95(3) should be adopted. In cases where there was an arbitration agreement, the scope of which embraced disputes of fact which were also raised in the petition, the question of a stay to arbitration turned on whether it was possible to submit such disputes to arbitration without trespassing on the exclusive jurisdiction of the court to make a winding up order. Cases had depended on the court’s ability to identify discrete, substantive issues which did not invoke the exclusive jurisdiction of the court. Where the underlying issues were central and inextricably connected to determination of the statutory question whether the company should be wound up on just and equitable grounds, the possibility of hiving off those issues became more difficult (paras. 94–109).

(4) The issues raised in the petition were not arbitrable. FMCH had a statutory right to petition and could not be compelled to adopt an alternative course of action. The basis of the claim in the present case was twofold: loss of trust and confidence by reason of the breaches by the majority directors of their fiduciary obligations, and irretrievable breakdown of the relationship between the majority and minority shareholders. The allegations against the majority directors were fundamental to FMCH’s contention that it was just and equitable to wind up the company. The plea of loss of trust and confidence was a conclusion from the allegations made against the majority directors themselves but they were key to justifying the petition. In order to determine the threshold question as to whether there were sufficient grounds to justify a winding up on just and equitable grounds, the court must evaluate all the circumstances of the case. The factual questions which the court had to determine were not mere questions of primary fact but required evaluation, both in relation to the gravity and significance of the facts and where responsibility lay for any breaches of duty or a breakdown in the relationship between the parties. The weight to be attached to the events relating to the course of the joint venture on which the majority and minority shareholders embarked, how one set of facts might cast light on others and their significance were all relevant to thethreshold issue of whether a just and equitable winding up would be justified. All the primary and secondary facts went to the resolution of the statutory threshold question whether it was just and equitable that the company should be wound up. That being the width of the court’s determination, it was difficult if not impossible to see how discrete issues could be identified and “hived off” to arbitration. The judge thought it was not necessary to decide whether the arbitration tribunal could or should decide the statutory question based on loss of confidence grounds. However, it was. The facts which the judge believed could be submitted for determination by an arbitral tribunal were the same facts that would answer the question posed by s.92(e) of the Companies Law. Presentation of the petition invoked the court’s jurisdiction to decide whether the conduct of the directors and the breakdown of the shareholders’ relationship justified winding up the company. Whether that decision ought to result in the demise of the company was a matter for the court. It could not decide whether an alternative and less drastic form of relief should be ordered unless and until it had first decided that threshold question. All of the facts in dispute in the petition went to that question (paras. 114–117; para. 144).

(5) An express agreement not to present a winding up petition would be lawful and would trigger a mandatory stay or an adjournment. The SHA contained no express agreement not to present a winding up petition. It was not possible to imply any obligation not to...