Re China Milk Products

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 22 July 2011
• Date: 22 July 2011
• Court: Grand Court (Cayman Islands)

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF CHINA MILK PRODUCTS GROUP LIMITED

Mrs. S. Corbett and B. Gowrie for the petitioner;

R. McDonough and Ms. K. Houghton for the majority bondholders;

Ms. R. Baxendale for a beneficial owner of shares.

Cases cited:

(1) Banco Economico S.A. v. Allied Leasing & Fin. Corp., 1998 CILR 102, not followed.

(2) Emmadart Ltd., In re, [1979] Ch. 540; [1979] 2 W.L.R. 868; [1979] 1 All E.R. 599, not followed.

(3) Galway & Salthill Tramways Co., Re, [1918] 1 I.R. 62, referred to.

(4) Global Opportunity Fund Ltd., In re, 1997 CILR N–7, referred to.

(5) Interchase Corp., ReUNK(1992), 111 ALR 561, referred to.

(6) Xinhua Sports & Entertainment Ltd., In re, Grand Ct., Fin. Servs. Div., Case No. FSD 48 of 2011, unreported, referred to.

Legislation construed:

Companies Law (2010 Revision), s.94(1):

‘An application to the Court for the winding up of a company shall be by petition presented either by-

(a) the company;’

s.94(2): The relevant terms of this sub-section are set out at para. 14.

s.104(3): ‘An application for the appointment of a provisional liquidator may be made under subsection (1) by the company ex-parte on the grounds that-

(a) the company is or is likely to become unable to pay its debts within the meaning of section 93; and

(b) the company intends to present a compromise or arrangement to its creditors.’

Companies-compulsory winding up-petition-locus standi to petition-intention of 2007 Companies Law reforms that s.94(1)(a) allow directors of insolvent company to present winding-up petition on ground of insolvency on behalf of company without approval of shareholders or authorization in articles of association-economic interest of shareholders disappears upon insolvency and directors then act in interests of creditors

Companies-compulsory winding up-petition-locus standi to petition-intention of 2007 Companies Law reforms to distinguish between solvent and insolvent companies-s.94(2) applied only to solvent companies-directors of solvent companies incorporated before March 1st, 2009 allowed to petition only if approved by shareholders-directors of solvent companies incorporated after March 1st, 2009 allowed to petition without shareholder approval if authorized in articles of association

The directors of a company presented a petition in the name of the company for its winding up on the ground of insolvency.

The petitioner was an investment holding company with shares listed on the Singapore Stock Exchange. Its sole asset was its investment in a Chinese dairy business. The petitioner raised finance through the issue of zero coupon convertible bonds, which were also listed on the Singapore Stock Exchange. Bondholders had the option, from a prescribed date, of requiring the petitioner to redeem some or all of the bonds at 116.82% of their principal amount. After the sharp decline of the Chinese dairy market, following the ‘melamine contamination scandal,’ valid redemption requests were received from all bondholders, which the petitioner was unable to pay. The company directors decided to present a winding-up petition without obtaining an ordinary resolution of the shareholders, and also applied to appoint provisional liquidators.

An initial ex parte hearing in the Grand Court (Jones, J.) was adjourned so that the proceedings could be advertised in an English language newspaper in Singapore, and to enable submissions to be prepared on whether the directors were entitled to present the petition without the authorization of the shareholders, in the light of the Companies Law (2010 Revision), s.94(2). At the first hearing, the petitioner submitted that the

words ‘incorporated after the commencement of this Law,’ in s.94(2), referred to the commencement of the principal Law in 1961. At a second hearing, the petitioner accepted that s.94(2) instead referred to the commencement of the Companies (Amendment) Law 2007, in 2009, and the hearing was adjourned to allow further submissions to be prepared.

At the inter partes hearing, the directors submitted that (a) they should be allowed to present the winding-up petition on behalf of the petitioner, under the Companies Law (2010 Revision), s.94(1)(a), without the authorization of the shareholders, as contrary authority was wrong; (b) s.94(2) applied only to petitions on behalf of solvent companies, as in cases of insolvency, in which the shareholders” economic interests would have disappeared, the directors should act in the interests of the creditors and it would be wrong to make the ability to present bankruptcy petitions subject to the shareholders” consent; and (c) provisional liquidators should be appointed because no bondholders or creditors had come forward to contest the application, and the proposed individuals were suitably qualified and experienced.

A majority of the bondholders supported the appointment of provisional liquidators.

Held, allowing the petition to proceed and appointing provisional liquidators:

(1) Directors of insolvent companies would, on a proper interpretation of the Companies Law, s.94(1)(a), be allowed to present winding-up petitions on behalf of their companies without approval by the shareholders or authorization in the articles of association. The English principle, previously adopted in the Cayman Islands, that directors of insolvent companies required such authorization was wrong and would not be applied. This was apparent from the 2007 amendment to the Companies Law, itself preceded by a detailed review of local insolvency law, which had recommended that directors be allowed to present winding-up petitions without shareholder approval in cases of insolvency. The Companies (Amendment) Bill had indicated a clear legislative intention to accept those recommendations and s.94(1)(a) would, therefore, be interpreted in accordance with the rest of the Companies Law, Part V, and the Companies Winding Up Rules, O.4, as permitting the directors of an insolvent company to present a winding-up petition on behalf of their company irrespective of the articles of association and without the co-operation of shareholders, whose economic interest in the company would, by that stage, have disappeared. Accordingly, the directors were required to act in the interests of the creditors. In the present case, the articles of association had authorized the directors to present the winding-up petition, but the court would have allowed them to present the petition even without such authorization (para. 10; para. 13; paras. 17–18).

(2) It followed that although the wording of s.94(2) prima facie allowed directors to present winding-up petitions without a shareholders” resolution only if the articles of association so authorized, the overall legislative

intent had clearly been to draw a distinction between solvent and insolvent companies, and the court would interpret s.94(2) as applying only to petitions on behalf of solvent companies. It therefore had no application to the present case (para. 20).

(3) Moreover, the application of s.94(2) to directors of solvent companies applied only in respect of companies incorporated after the commencement, in 2009, of the Companies (Amendment) Law 2007, as the reference to companies ‘incorporated after the commencement of this Law’ did not refer to the commencement of the principal Law in 1961. To hold that it did would render the phrase meaningless, as it had not been possible to incorporate a company under the law of the Cayman Islands before 1961. It followed that directors of solvent companies incorporated before March 1st, 2009 would not be allowed to present a winding-up petition on the just and equitable ground without a shareholders” resolution, but directors of solvent companies incorporated after March 1st, 2009 could do so if so authorized by the...