Re HSH Cayman

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 12 February 2010
• Court: Grand Court (Cayman Islands)
• Date: 12 February 2010

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF HSH CAYMAN I GP LIMITED, HSH CAYMAN II GP LIMITED, HSH CAYMAN V GP LIMITED and HSH COINVEST (CAYMAN) GP LIMITED

T. Mowschenson, Q.C., G. Halkerston and J.N. Wood for the petitioner;

C. Béar, Q.C. and V. Chittleborough for the companies.

Cases cited:

(1) Camburn Petroleum Prods. Ltd., In re, [1980] 1 W.L.R. 86; [1979] 3 All E.R. 297, dicta of Slade J. applied.

(2) Demaglass Holdings Ltd., Re, [2001] 2 BCLC 633, distinguished.

(3) Falcon R.J. Devs. Ltd., Re, [1987] BCLC 437; (1987), 3 BCC 146, dicta of Vinelott J. applied.

(4) Lummus Agricultural Servs. Ltd., Re, [2001] 1 BCLC 137; [1999] BCC 953, dicta of Park J. applied.

Companies-compulsory winding up-grounds for winding up-inability to pay debts-creditors prima facie entitled to winding-up order if debt undisputed and company unable to pay unless special reason to refuse or stay-solvency on a balance sheet test and potential future increase in value not special reasons-decision to proceed with compulsory winding up commercial matter for creditors

Companies-compulsory winding up-stay of winding up-order not necessarily stayed where bankruptcy proceedings (e.g. under US Bankruptcy Code, Chapter 11) commenced overseas-stay may be refused if no evidence of benefits of overseas proceedings; not supported by majority of creditors; or unsuitable

The petitioner sought to wind up four Cayman companies on the ground that they were unable to pay their debts.

The companies had been incorporated to act as the general partners to four limited partnerships, which had been established to finance the

acquisition of shares in a German bank. The general partners had entered into four separate loan facility agreements with the petitioner bank to fund the acquisition. The sale of the shares was subject to various restrictions. The German bank was subject to an ongoing investigation by the European Commission, the outcome of which might have affected the future valuation of the shares. The general partners subsequently defaulted on their repayments and the bank petitioned to wind them up on the ground of their insolvency.

The Court of Appeal (Chadwick, P., Forte and Mottley, JJ.A.) initially set aside the petitions (in proceedings reported at 2010 (1) CILR 114) on the ground that the petitioner had failed to comply with the requirements of the Companies Winding Up Rules 2008, and ordered a stay of all further proceedings. The petitioner then applied for leave to amend its petitions, and the companies cross-applied for the petitions to be struck out as an abuse of process. The Grand Court (Jones, J.) dismissed the strike-out applications (in proceedings reported at 2010 (1) CILR 148) and granted leave to amend the petitions. The petitioner amended its petitions accordingly, and sought an order winding up the companies.

The companies accepted that the petitioner represented creditors with standing to present the petitions and that the facts in the amended petitions had been proved, but submitted that the court should adjourn or stay the petitions because (a) the companies were balance sheet solvent; (b) a winding-up order would be destructive of intrinsic value and not commercially sensible; (c) the companies had instead commenced more suitable proceedings under Chapter 11 of the US Bankruptcy Code; and (d) the proposed liquidators were neither sufficiently independent nor experienced.

Held, ordering the winding up of the companies:

(1) Given that the debts were not disputed and that it was established that the companies were unable to pay their debts, the petitioner would have a prima facie right to immediate court orders winding up the companies on the grounds of their insolvency, unless there were exceptional circumstances justifying the refusal or stay of the proceedings, and since no such circumstances had been found here, the companies would be wound up. Neither the companies” claims to balance sheet solvency; the possibility of an increase in the realizable value of their investments; nor their claims that the current management was best placed to retain their value would constitute special reasons justifying the refusal of the winding-up orders or the stay of the petitions-in any event, on the basis of the valuation evidence it was likely that, in the instant case, the companies were not balance sheet solvent. These were commercial matters for the company”s creditors and not the court to determine-the creditors were entitled to prefer a compulsory winding up conducted by an official liquidator over continuing with the existing management. Further, the facts that the sale of the companies” investments was subject to restrictions; that the sale of the companies” investments might end the

companies” rights to representation on the supervisory board of the bank in which the investment was made; and that the value of the company”s investments would or might be adversely affected by events outside the liquidator”s control (in this case, the potential findings of the European Commission), could not amount to sufficiently special circumstances justifying the refusal of the orders or staying the proceedings. These would not be unusual situations with which official liquidators would have to deal (paras. 11–12; para. 15; paras. 21–23; para. 26; paras. 28–31).

(2) The fact that the companies had commenced proceedings under Chapter 11 of the US Bankruptcy Code would not by itself constitute a special reason. This course of action would need to be supported by a substantial majority of independent creditors-whose backing would be required to impose any reorganization-and in this case, it was opposed by all of the independent creditors. Chapter 11 proceedings would be better suited to situations in which the parties could be expected to reach consensus-they would be inappropriate here, where the parties” relationship had deteriorated. Further, forcing the parties into Chapter 11 proceedings-suitable in a situation of multiple creditors or shareholders-would be inappropriate in a case such as this, since there were effectively only two interested parties-the lenders acting in concert constituting the whole body of creditors, and the companies also acting in concert. Finally, the required supporting evidence detailing the positive benefits to all the creditors of a reorganization under Chapter 11, in the form of a draft plan, had not been submitted to the court. Since the lenders had determined that the immediate winding up of the companies was in their commercial interests; given that the companies, by seeking a refusal of the winding-up order or a stay of proceedings, were only seeking to maximize the value of their investments with no downside risk; and as the proposed liquidators satisfied the requirements of independence and experience, the court would order the winding up of the companies (paras. 33–47).

1 JONES, J.: On September 9th, 2009, ABN AMRO Bank N.V. (‘the petitioner’) presented winding-up petitions against HSH Cayman I GP Ltd., HSH Cayman II GP Ltd., HSH Cayman V GP Ltd. and HSH Coinvest (Cayman) GP Ltd., which I shall refer to collectively as the ‘the

companies,’ on the ground of insolvency. On November 13th, 2009, Foster, Ag. J. made winding-up orders and appointed two qualified insolvency practitioners, namely Mr. Walker and Mr. Stokoe, who are respectively a partner and a director of the Cayman firm of PricewaterhouseCoopers, as joint official liquidators of each company. On December 9th, 2009, the Court of Appeal set aside these winding-up orders on the grounds that the petitioner had failed to comply with the requirements of the Companies Winding Up Rules 2008, but did not strike out the petitions. Instead, it ordered a stay of all further proceedings for seven days, during which period the petitioner applied for leave to amend its petitions and the companies made a cross-application for them to be struck out as an abuse of the process. On December 17th, 2009, I dismissed the strike-out applications, granted leave to amend the petitions and gave directions for trial. This is the trial of the amended petitions.

2 The companies now accept that there has been full compliance with the procedural and evidential requirements of the Companies Winding Up Rules 2008 and that the facts pleaded in the amended petitions have been proved. In particular, it is now admitted that the petitioner represents creditors with standing to present the winding-up petitions and that each of the companies is insolvent by reference to the cash flow test prescribed by s.92(d) of the Companies Law (2009 Revision).

3 A winding-up order is a discretionary remedy, but it is well established as a matter of Cayman law that an unpaid petitioning creditor in respect of an undisputed debt is entitled to expect the court to exercise its discretion in his favour by making a winding-up order in the absence of some exceptional circumstances or special reasons. Recognizing that the burden of argument lies upon the companies to establish that there is some exceptional circumstance or special reason which justifies the court departing from the usual course, I agreed that counsel for the companies should be allowed to open the case and have the last word in reply.

4 It was also agreed that the evidence and arguments relevant to the way in which the court should exercise its discretion are the same in each case, with the result that it was convenient to hear the four petitions together. The amounts owing by each company are different and only three of the four companies claim to be solvent on a balance sheet test, but it appeared to be common ground that these differences did not affect the parties” arguments.

Factual background

5 The relevant factual background can be summarized quite simply as follows. The companies were incorporated in the Cayman Islands on September 15th, 2006...