Re China Shanshui Cement Group Ltd

• Jurisdiction: Cayman Islands
• Judge: (Mangatal, J.)
• Judgment Date: 25 November 2015
• Court: Grand Court (Cayman Islands)
• Date: 25 November 2015

Grand Court, Financial Services Division

(Mangatal, J.)

IN THE MATTER OF CHINA SHANSHUI CEMENT GROUP LIMITED

M. Crawford and Ms. A. Perry for the company;

S. Moverley-Smith, Q.C, U. Payne, O. Payne and M. Kish for the majority shareholders;

G. Manning, G. Cowan, N. Lupton, Ms. F. McAdam, J. Golaszewski and Ms. A. Dixon for the creditors.

Cases cited:

(1) Alibaba.com, In re, 2012 (1) CILR 272, referred to.

(2) Banco Economico S.A. v. Allied Leasing & Fin. Corp, 1998 CILR 102, followed.

(3) China Milk Products Group Ltd., In re, 2011 (2) CILR 61, not followed.

(4) Dyxnet Holdings Ltd. v. Current Ventures II Ltd., 2015 (1) CILR 174, referred to.

(5) Emmadart Ltd., In re, [1979] Ch. 540; [1979] 2 W.L.R. 868; [1979] 1 All E.R. 599, followed.

(6) Fernlake Pty. Ltd., Re(1994), 13 ACSR 600, considered.

(7) First Virginia Reinsurance Ltd., ReUNK(2003), 66 WIR 133, referred to.

(8) Global Opportunity Fund Ltd., In re, 1997 CILR N–7, followed.

(9) Inkerman Grazing Pty. Ltd., ReUNK(1972), 1 ACLR 102, referred to.

(10) Interchase Mgmt. Servs. Pty. Ltd., Re(1992), 9 ACSR 148, referred to.

(11) Lornamead Acquis. Ltd. v. Kaupthing Bank HF, [2013] 1 BCLC 73; [2011] EWHC 2611 (Comm), referred to.

(12) Miharja Dev. Sdn. Bhd. v. Heong, [1995] 1 MLJ 101, referred to.

(13) Siebe Gorman & Co. Ltd. v. Barclays Bank Ltd., [1979] 2 Lloyd”s Rep. 142, considered.

(14) Spectrum Plus Ltd., In re, [2004] 2 W.L.R. 783; [2004] 1 All E.R. 981; [2004] BCC 51; [2004] 1 BCLC 335; [2004] EWHC 9 (Ch), followed.

(15) Trans Pacific Corp., Re(2009), 72 ACSR 327, referred to.

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

Legislation construed:

Companies Law (2013 Revision), s.94: The relevant terms of this section are set out at para. 26.

Companies Winding Up Rules 2008, O.3, r.10(1):

‘This Rule applies where a creditor petitions and is subsequently found not to have been entitled to do so or where the petitioner—

(a) fails to advertise his petition;

(b) consents to his position being withdrawn;

(c) fails to appear on the hearing of his petition;

(d) allows his petition to be adjourned or dismissed; or

(e) appears, but does not apply for an order in terms of the prayer of his petition.’

Companies—compulsory winding up—petition—locus standi to petition—director not entitled to petition without express authorization of shareholders or articles of association—general terms in articles giving director all powers of company insufficient as Companies Law (2013 Revision), s.94 clearly states petition to be presented by company not directors—case law to contrary not followed as clearly wrong—legislative amendment necessary to allow directors to present petitions without authorization

Courts—Grand Court—precedent—court to follow previous Grand Court decisions unless convinced they are incorrect

The directors of the company petitioned for the appointment of joint provisional liquidators (‘JPLs’).

The company was incorporated in the Cayman Islands as a holding company for a group of Chinese companies; it issued a number of senior notes which were repayable in 2020, with biannual interest payments in March and September of each year. Interest payments were duly made until September 2015, but the company subsequently became cash-flow insolvent (though it remained balance-sheet solvent) and was unable to make any further interest payments. The board of directors of the company resolved to wind up the company and to present a petition seeking the appointment of JPLs.

The petition was opposed by the company”s majority shareholders and a number of noteholders, who applied for it to be struck out as an abuse of process as the Companies Law (2013 Revision), s.94 did not allow directors to present winding-up petitions unless authorized to do so by the company or its articles of association.

The majority shareholders submitted that (a) English case law concerning the Companies Act 1948, s.224(1) (the equivalent of s.94) indicating that directors could not present petitions without authorization had been followed in the Cayman Islands; (b) judgments of the Grand Court suggesting the contrary had not been subsequently followed and were wrongly decided, as s.94 clearly indicated that directors could not present winding-up petitions without authorization; (c) the Companies Law had

been comprehensively reviewed in 2007 and the legislature had made a clear decision not to alter the unambiguous wording of s.94, unlike in England where legislation had been enacted in order to alter the rule; (d) the company”s articles did not grant authorization to present the petition as they did not expressly stipulate that directors were empowered to present winding-up petitions; and (e) a creditor should not be substituted as petitioner as it was necessary that a creditor petition be substituted, and no creditor had done so.

The company submitted in reply that (a) the English case law supporting the proposition that directors could not present winding-up petitions without authorization had only been reluctantly endorsed in the Islands; (b) the judgments of the Grand Court which had held that directors could present winding-up petitions should be followed as they were judgments of courts of co-ordinate jurisdiction, which should not be overturned unless they were clearly erroneous; (c) it was settled practice in the Islands, England and the Commonwealth that directors could present winding-up petitions; (d) in any event, the company”s articles of association authorized the directors to present the petition as they were granted all powers that could be exercised by the company; and (e) the court should not strike out the petition if it concluded that the directors had no standing to present the petition, but should instead allow the substitution of a creditor as petitioner as CWR, O.3, r.10(1) should be read disjunctively in order to allow substitution either (i) when a creditor presented a petition and was found not to be entitled to do so; or (ii) when one of the grounds in paras. (a)–(e) was established (e.g. by showing that a petitioner consented to his petition being withdrawn (CWR, O.3, r.10(1)(b)).

Held, striking out the winding-up petition:

(1) The directors did not have standing to petition for the winding up of the company or the appointment of joint provisional liquidators and the petition would therefore be struck out. Section 94 of the Companies Law (2013 Revision) clearly stated that an application to wind up a company was to be made by a company and not its directors, unless they were expressly authorized to do so by the company”s articles of association. The section had not been amended when the Companies Law was considered by the legislature in 2007, indicating a deliberate legislative decision that directors should continue to be required to seek authorization before presenting a winding-up petition. Further, it did not appear that prohibiting directors from presenting winding-up petitions without authorization produced impracticable results, as was confirmed by the fact that this prohibition had applied in the Islands for a significant period of time prior to 2011 (paras. 69–70; paras. 72–74; paras. 81–82; para. 84).

(2) Judgments of the Grand Court indicating that directors were entitled to present winding-up petitions without authorization if the company was balance-sheet solvent would not be followed, as there was no evidence that they had subsequently been applied by the court, and prior to 2011 the case law had held that directors were prohibited from presenting

winding-up petitions without authorization. Though the court was generally to follow previous decisions of the Grand Court in the interest of certainty, it was entitled to depart from such decisions if convinced that they were incorrect. As the wording of the legislation clearly established that directors were not to present winding-up petitions without authorization, contrary case law would not be followed, although such a rule was no longer applied in many Commonwealth jurisdictions. The foregoing was also confirmed by the fact that the English courts had continued to apply the rule prohibiting presentation of a winding-up petition by a director without the company”s authorization until the Insolvency Act 1986 was enacted, suggesting that legislative amendment was necessary in order to discontinue application of the rule (paras. 37–39; paras. 64–65; para. 71; paras. 77–79).

(3) The company”s articles of association did not specifically authorize the directors to present a winding-up petition as they merely stated in general terms that the directors were vested with the same powers as the company (paras. 75–76).

(4) A creditor would not be substituted pursuant to CWR, O.3, r.10 as petitioner in place of the directors, as no petition had been presented indicating that any of the creditors was prepared to take their place, and no creditor had otherwise indicated an intention to be substituted. CWR, O.3, r.10(1) was not to be read disjunctively so as to permit substitution either (a) when ‘a creditor petitions and is subsequently found not to have been entitled to do so’; or (b) when one of the grounds specified in paras. (a)–(e) was established. It was necessary, therefore, for a creditor”s petition to be presented in order for a petitioner to be substituted (para. 83).

1 MANGATAL, J.: China Shanshui Cement Group Ltd. (‘the company’) was incorporated in the Cayman Islands on April 26th, 2006 as an exempted non-resident company limited by shares under the Companies Law (2004 Revision), with a registered office situated at PO Box 309, Ugland House, South Church Street, George Town, Grand Cayman.

2 The company”s headquarters are situated at Sunnsy Industrial Park, Gushan Town, Changqing District, Jinan, Shandong, in the People”s Republic of...