Evenstar Master Fund Spc (for and on Behalf of Evenstar Master Sub-Fund I Segregated Portfolio) and Evenstar Special Situations Ltd v Mo and Fang Holdings Ltd
| Jurisdiction | Cayman Islands |
| Judge | (Smellie, C.J.) |
| Judgment Date | 13 September 2021 |
| Court | Grand Court (Cayman Islands) |
(Smellie, C.J.)
Companies — compulsory winding up — dispositions and transfers during winding up — validation by court — application for validation of proposed disposition of property, namely payment by solvent company of sums due under convertible note, granted — payment within directors’ powers and in company’s interests — no suggestion that directors acting other than in good faith — payment in ordinary course of business
	Held, ruling as follows:
	(1) Section 99 did not prohibit a company from trading or making payments once a winding-up petition had been presented against it and pending the hearing of the petition. In the case of a solvent company (as in the present case), it would often be in the interests of all members, and fair to the directors who would otherwise be at potential risk of personal liability, that the company continued to trade as usual. The longstanding practice of the court was to validate payments made by a company whilst a winding-up petition was pending if the payment was made honestly, for the benefit of the company and in the ordinary course of business. Before granting a validation order the court must generally be satisfied that: the proposed disposition was within the powers of the directors; the directors believed the disposition to be necessary or expedient in the interests of the company; the directors had acted in good faith in reaching that decision, the burden of establishing bad faith being on the party opposing the application; the reasons for the disposition were ones which an intelligent and honest director could reasonably hold; and payment might not be validated where irregularities in the conduct of the affairs of the company could be shown. These guidelines were not exclusive nor necessarily applicable to every case (paras. 20–24).
	(2) The payment should be validated. The requirements set out in the case law were plainly met. The payment was within the powers of the directors. Even if the assertion that the independent directors were not validly appointed were correct (which was not admitted), at no point had the first respondent’s status as a director of the company been questioned and it was he who had signed the agreement on behalf of the company, as he was authorized to do. The payment was in the interests of the company. The company acknowledged that the sums under the note were due and owing. It considered that non-payment would be detrimental to it and risk SGCB presenting a creditor’s winding up petition (or supporting the petitioners’ petition) notwithstanding the company’s solvency. If any petition were a success and the company placed into official liquidation, the board considered that would result in considerable destruction of value. Furthermore, the agreement obliged the company to make only 50% of the payment, which commercial terms were plainly in the best interests of the company. As to whether the directors were acting in good faith and whether the payment was one that an honest and intelligent director would make, the validation application was unopposed. There was no suggestion that in seeking to make the payment the directors were acting otherwise than in good faith or not as any honest and intelligent director would act. The payment was in the company’s view a payment in the ordinary course ofbusiness. In the circumstances, it was necessary and expedient, and in the interests of the investors, for the payment to be made (paras. 25–34).
(1)	Burton & Deakin Ltd., In re, [1977] 1 W.L.R. 390; [1977] 1 All E.R. 631, referred to.
(2)	Cybervest Fund, In re, 2006 CILR 80, considered.
(3)	DD Growth Premium 2X Fund, In re, 2013 (2) CILR 361, referred to.
(4)	Fortuna Dev. Corp., In re, 2004–05 CILR 533, considered.
(5)	Freerider Ltd., In re, 2010 (2) CILR 154, referred to.
(6)	Obelisk Global Fund SPC, In re, Cause No. FSD 87 of 2021; Grand Ct., August 12th, 2021, referred to.
(7)	Premier Assur. Group SPS Ltd., In re, Cause No. FSD 264 of 2020; Grand Ct., September 10th, 2021, referred to.
(8)	Skandinaviska Enskilda Banken A.B. v. Conway, 2019 (2) CILR 245, referred to.
(9)	Torchlight Fund LP, In re, 2018 (1) CILR 290, referred to.
(10)	Trident Microsystems (Far East) Ltd., In re, 2012 (1) CILR 424, referred to.
(11)	Weavering Macro Fixed Income Fund Ltd., In re, 2016 (2) CILR 514, referred to.
Companies Act (2021 Revision), s.99: The relevant terms of this section are set out at para. 19.
	The petitioners sought the winding up of a company.
	In November 2020, the petitioners presented a petition to wind up a company (Fang Holdings Ltd.) on the just and equitable basis pursuant to s.92(e) of the Companies Act. The petitioners described themselves as long-term investors in the company. They alleged that the first respondent, as the company’s controlling shareholder, and its board of directors had caused the company’s business to be pursued and its assets utilized for the wrongful purpose of benefitting the first respondent and persons associated with him. The petitioners further alleged that the rights of members had been wrongfully infringed, inter alia by the unlawful dilution of their share interests. The company was cash flow solvent and balance sheet solvent.
	In 2015, Safari Group CB Holdings Ltd. (“SGCB”) had purchased a convertible note in an original aggregate principal amount of US$72m. The presentation of the winding-up petition triggered an event of default under the note. As a consequence, the outstanding principal and accrued and unpaid interest on the note became due and payable. The company entered into negotiations with SGCB in relation to payment of the debt and an agreement was made between SGCB, the company and China Index Holdings Ltd. (an affiliate of the company) whereby China Index Holdings Ltd. would pay only 50% of the sums due. The company considered the payment to SGCB to be in its best interests.
	The company sought an order that any payment of sums payable by it to...
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