Re Freerider Ltd

• Jurisdiction: Cayman Islands
• Judge: (Foster, Ag. J.)
• Judgment Date: 11 November 2009
• Court: Grand Court (Cayman Islands)
• Date: 11 November 2009

Grand Court, Financial Services Division

(Foster, Ag. J.)

IN THE MATTER OF FREERIDER LIMITED

J.P. Walton and Ms. K. Brown for the petitioner;

A. Turner and Ms. R. Lawrence for the company and opposing shareholder.

Cases cited:

(1) A. & B.C. Chewing Gum Ltd., In re, [1975] 1 W.L.R. 579; [1975] 1 All E.R. 1017, considered.

(2) Arrow Trading & Invs. v. Edwardian Group Ltd. (No. 2), [2004] BCC 955; [2005] 1 BCLC 696; [2004] EWHC 1319 (Ch), considered.

(3) Banco Economico S.A. v. Allied Leasing & Fin. Corp., 2001 CILR 93, considered.

(4) Bathampton Properties Ltd., In re, [1976] 1 W.L.R. 168; [1976] 3 All E.R. 200, referred to.

(5) CVC Opportunity Equity Partners Ltd., In re, 1999 CILR 378; further proceedings, sub nom.CVC/Opportunity Equity Partners Ltd. v. Demarco Almeida, 2002 CILR 77, referred to.

(6) Company (No. 004502 of 1988), ex p. Johnson, In re a, [1991] BCC 234; [1992] BCLC 701, considered.

(7) Company (No. 005685 of 1988), ex p. Schwarcz, In re aUNK(1989), 5 BCC 79; [1989] BCLC 424; [1989] PCC 438, considered.

(8) Company (No. 001126 of 1992), In re a, [1993] BCC 325; [1994] 2 BCLC 146, dictum of Lindsay J. applied.

(9) Crossmore Elec. & Civil Engr. Ltd., In reUNK(1989), 5 BCC 37; [1989] BCLC 137, dictum of Hoffmann J. applied.

(10) Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360; [1972] 2 W.L.R. 1289; [1972] 2 All E.R. 492, considered.

(11) Hydrosan Ltd., In re, [1991] BCC 19; [1991] BCLC 418, dicta of Harman J. applied.

(12) Milgate Devs., In re, [1991] BCC 24; [1993] BCLC 291, followed.

(13) Pickering v. StephensonELR(1872), L.R. 14 Eq. 322; 41 L.J. Ch. 493; 26 L.T. 608, considered.

(14) Strategic Turnaround Master Partnership Ltd., In re, Grand Ct., November 28th, 2008, unreported; on appeal, 2008 CILR 447, considered.

Legislation construed:

Companies Law (2009 Revision), s.155(1)(a): The relevant terms of this paragraph are set out at para. 17.

Companies Winding Up Rules 2008, O.3, r.11: The relevant terms of this rule are set out at para. 3.

Companies-compulsory winding up-parties-company to demonstrate participation in winding-up proceedings ‘necessary or expedient in interests of company as a whole’-possibility of quasi-partnership being wound up not sufficient to discharge heavy onus since only petitioner and respondent shareholders have real interest in outcome-proceedings to be inter partes between shareholders but company may remain nominal respondent and able to apply for validation order-company”s funds not to be spent on dispute between shareholders

The petitioner sought the winding up of a Cayman company on the just and equitable ground.

The petitioner was a shareholder and director of the company and the petition was opposed by the company and the respondent, its other principal shareholder and director, who sought a strike-out or stay of the petition. The company was established as a quasi-partnership between the petitioner and respondent (each party holding 50% of the voting shares) to exploit the former”s invention commercially. However, the relationship between the parties had irretrievably broken down, and the petitioner sought the winding up of the company to end their joint venture on the ground that there had been a fundamental loss of mutual trust and confidence and alleging mismanagement by the respondent. The respondent refuted the allegations submitting that their shareholders” agreement entitled him solely to control the administration and business management of the company.

Before the petition was heard, the petitioner sought directions pursuant to O.3, r.11 of the Companies Winding Up Rules 2008 as to whether the company would be allowed actively to participate in the proceedings and incur costs by doing so, since it would possibly be prejudicial to him and the company if the petition were successful and the respondent was unable to meet its costs.

The respondent and the company submitted that the Companies Winding Up Rules 2008, O.3, r.11(2)(a) and (b) were ultra vires because the Insolvency Rules Committee only had the power to give effect to legislation and giving the court a wider jurisdiction to prevent a company from participating in a winding-up petition against it, which had been the long-standing practice in the Cayman Islands, amounted in effect to

legislating and thus the sub-rules were invalid. It was further submitted that the company had an interest in the petition since if it were successful then it would be wound up and should therefore be allowed to participate in the proceedings.

Held, directing that the company should be treated as the subject-matter of the petition, which would be heard inter partes between the shareholders:

(1) The company would not be permitted to participate actively in the proceedings on the basis of the established principle that a company”s funds should not be expended on what was in reality a dispute between shareholders-a principle not confined to winding-up petitions on the just and equitable ground. In accordance with this principle, the company would have to discharge the onus that it was ‘necessary or expedient in the interests of the company as a whole’ for it to participate and incur costs. It was evident that this was a dispute between the principal shareholders of a quasi-partnership, the petitioner and respondent, rather than one involving any independent interest of the company, since the disagreement centred on the respondent”s role under the shareholders” agreement. Further, the possibility that it could be wound up could not be deemed an interest of the company itself, since it was in reality a quasi-partnership between the petitioner and the respondent, and it was only they who had the real interest in whether or not the petition was successful. There was no claim against the company itself and thus the company had not discharged the heavy burden upon it to show that it was ‘necessary or expedient in the interests of the company as a whole’ to participate in the hearing. It would therefore be treated merely as the subject-matter of the proceedings, which would be heard inter partes as between the petitioner and the respondent, and the company would remain only as the nominal respondent, only actively participating if it required a validation order to meet legitimate payment obligations in the ordinary course of business (para. 37; paras. 43–47).

(2) The Insolvency Rules Committee were empowered by s.155(1)(a) of the Companies Law (2009 Revision) to make rules to give effect to Parts IV, V and XVI of the Law, which included enabling the court to direct in its discretion which parties should most appropriately participate in winding-up proceedings. Order 3, r.11(2)(a) and (b) of the Companies Winding Up Rules 2008 were essentially procedural in nature, giving effect to Part V of the Companies Law and were therefore not ultra vires, and the court was therefore entitled use the sub-rules to give directions as to whether the company should actively participate in the petition and be allowed to incur costs (para. 20; para. 42).

1 FOSTER, Ag. J.: The petitioner, Mr. Adrianus Heinen, is a voting shareholder and director of Freerider Ltd. (‘the company’). He has presented a petition to wind up the company pursuant to s.92(e) of the Companies (Amendment) Law 2007 (now the 2009 Revision) on the ground that it is just and equitable that it should be wound up. The company was incorporated in the Cayman Islands on June 11th, 2003. The petition is opposed at present by the company and also by the other principal shareholder and director of the company, Mr. Pieter Le Comte.

The company has also filed an application for the petition to be struck out pursuant to O.18, r.19 of the Grand Court Rules on the ground that it discloses no reasonable cause of action, or it is scandalous, frivolous or vexatious or that it is otherwise an abuse of the process of the court. As an alternative to a strike-out of the petition, the company seeks a stay pending the resolution of proceedings brought by the company in the Supreme Court of the State of New York (Index No. 602159/08) (‘the New York proceedings’). However, the parties have now agreed that the company”s application to strike out or stay the petition should be heard at the same time as the hearing of the petition itself, which is anticipated to be in approximately five months” time, in March 2010.

2 The application before me is on the petitioner”s summons for directions issued pursuant to O.3, r.11 of the Companies Winding Up Rules 2008. The particular issue in dispute concerns the applicability of r.11(2)(a) and (b) and, if applicable, whether or not directions should be given pursuant to those sub-rules.

3 Order 3, r.11 of the Companies Winding Up Rules provides as follows:

‘(1) Upon the presentation of a petition by a contributory seeking a winding up order or an order for alternative relief under section [95](3) of the Law on the ground contained in section 92(e), the petitioner must at the same time issue a summons for directions in respect of the matters contained in this Rule.

(2) Upon hearing the summons for directions, the Court shall give such directions as it thinks appropriate in respect of the followings [sic] matters-

(a) whether or not the company is properly able to participate in the proceeding or should be treated merely as the subject-matter of the proceeding;

(b) whether the proceeding should be treated as a proceeding against the company or as an inter partes proceeding between one or more members of the company as petitioners and the other member or members of the company as respondents;

. . .’

[The rule continues to list other possible directions which are not material to the particular issues in dispute.]

4 Section 95(3) of the Companies Law, referred to in r.11(1), provides as follows:

‘If the petition is presented by members of the company as contributories on the...