Re HSH Cayman

• Jurisdiction: Cayman Islands
• Judge: (Chadwick, P., Forte and Conteh, JJ.A.)
• Judgment Date: 24 May 2010
• Court: Court of Appeal (Cayman Islands)
• Date: 24 May 2010

Court of Appeal

(Chadwick, P., Forte and Conteh, JJ.A.)

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

M. Crystal, Q.C. and Ms. C. Wilkins for the appellants;

T. Mowschenson, Q.C. and G. Halkerston for the respondent.

Cases cited:

(1) Abidin Daver, The, [1984] A.C. 398; [1984] 2 W.L.R. 196; [1984] 1 All E.R. 470; [1984] 1 Lloyd”s Rep. 339; (1984), 128 Sol. Jo. 99, referred to.

(2) Babcock & Wilcox (Canada) Ltd., ReUNK(2000), 5 B.L.R. (3d) 75; 18 C.B.R. (4th) 157, distinguished.

(3) Bank of Credit & Commerce Intl. S.A., Re, [1992] BCLC 570; [1992] BCC 83, referred to.

(4) Banque Indosuez S.A. v. Ferromet Resources Inc., [1993] BCLC 112, referred to.

(5) Barclays Bank plc v. Homan, [1993] BCLC 680; [1992] BCC 757, referred to.

(6) Cambridge Gas Transp. Corp. v. Navigator Holdings plc (Creditors” Cttee.), [2007] 1 A.C. 508; 2005–06 MLR 297; [2006] 3 W.L.R. 689; [2006] 3 All E.R. 829; [2006] BCC 962; [2007] 2 BCLC 141; [2006] UKPC 26, distinguished.

(7) Camburn Petroleum Prods. Ltd., In re, [1980] 1 W.L.R. 86; [1979] 3 All E.R. 297, referred to.

(8) HIH Casualty & Gen. Ins. Ltd., In re, [2008] 1 W.L.R. 852; [2008] Bus. L.R. 905; [2008] 3 All E.R. 869; [2008] BCC 349; [2008] BPIR 581; [2008] Lloyd”s Rep. I.R. 756; [2008] UKHL 21, distinguished.

(9) Hilton v. GuyotUNK(1895), 159 U.S. 113; 16 S. Ct. 139; 40 L. Ed. 95, referred to.

(10) Lummus Agricultural Servs. Ltd., Re, [2001] 1 BCLC 137; [1999] BCC 953, referred to.

(11) Morguard Invs. Ltd v. De Savoye, [1990] 3 S.C.R. 1077; (1990), 76 D.L.R. (4th) 256; 52 B.C.L.R. (2d) 160; 46 C.P.C. (2d) 1; [1991] 2 W.W.R. 217, referred to.

Legislation construed

Companies Law (2009 Revision), s.99: The relevant terms of this section are set out at para. 47.

Conflict of Laws-companies-compulsory winding up-comity may require stay of Cayman proceedings if Cayman judgment would make task of foreign court more difficult by raising extra issues for it to determine-no stay if issues raised will necessarily come before foreign court (i.e. exist independently of Cayman judgment), or if unlikely to come before foreign court (e.g. because parties unlikely to contest issue)

The respondent/petitioner bank sought the winding up of the four appellant Cayman companies in the Grand Court, Financial Services Division on the ground that they were unable to pay their debts.

The appellant companies had been incorporated to act as the general partners to four limited partnerships, which had been established under the laws of Alberta, Canada to finance the acquisition of shares in a German bank-an acquisition which gave them certain ‘shareholder rights’ over the German bank. The general partners had entered into four separate loan facility agreements with the respondent/petitioner bank to fund the acquisition. The general partners subsequently defaulted on their repayments, and, on September 8th, 2009, the bank petitioned to wind them up on the ground of their insolvency. On October 30th, 2009, the appellant companies each executed an amended limited partnership agreement (the validity of which was challenged by the respondent/petitioner bank), purporting to permit them to appoint JCF (a major private equity firm managed by J. Christopher Flowers) as an additional general partner, which they then did (together, the ‘post-petition amendments’).

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 the 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 and sought the winding up of the companies, while the companies sought

the adjournment or stay of the petitions on the basis, inter alia, that the companies had instead commenced more suitable proceedings under Chapter 11 of the US Bankruptcy Code in Delaware.

The Grand Court (Jones, J.) ordered the winding up of the companies on the ground that they were unable to pay their debts (in proceedings reported at 2010 (1) CILR 157), holding, inter alia, that the lenders were entitled to prefer a compulsory winding up over continuing with the existing management, and that the commencement of proceedings in Delaware did not, by itself, justify the adjournment or stay of the petitions. In particular, Chapter 11 proceedings were inappropriate since (a) they were opposed by all the independent creditors; (b) they were better suited to situations, unlike the present one, in which the parties could be expected to reach consensus; (c) they would be suitable when there were multiple parties, unlike the present case in which there were effectively only two; and (d) no evidence of the benefits of the Chapter 11 procedure had been submitted to the court.

The companies appealed against the making of the winding-up orders on the grounds that, inconsistently with the common law principle of comity, it raised issues which made the Delaware court”s task more difficult. They submitted that issues were raised as to (a) the validity of the post-petition amendments; (b) who had the right to speak on behalf of the companies in the Chapter 11 proceedings; (c) whether, under Alberta law, the limited partnerships had been automatically dissolved; and (d) if so, whether, under German law, the limited partnerships had lost their shareholder rights over the German bank. They further submitted that the judge was wrong to conclude that the collective view of the lenders as to what was in their best interests determined the question of whether to make a winding-up order.

The respondents submitted in reply that the making of the winding-up orders was in keeping with the principle of comity, as it had not made the task of the Delaware court more difficult. The first two issues referred to by the appellant companies existed independently of the making of the orders, as (a) the post-petition amendments had been a potential breach of the loan facility agreement and were also vulnerable to attack under s.99 of the Companies Law (2009 Revision) if a winding-up order were made in the future; and (b) the Delaware court would wish to consider what weight to accord to any representations purporting to be made on behalf of the companies regardless of whether winding-up orders had been made. The remaining two issues were unlikely to require determination by the Delaware court, as (c) whether the making of the orders had the effect of dissolving the limited partnerships had no effect on Chapter 11 proceedings; and (d) no party was likely to advance the case that the limited partnerships had lost their shareholder rights, as this ran contrary to the interests of the lenders and JCF submitted that it was entry into Chapter 11 proceedings itself, and not the making of the orders, which had that effect. They further submitted that the judge had not erred as he did not conclude

that the collective view of the lenders as to what was in their best interests determined whether to make a winding-up order.

Held, dismissing the appeal:

(1) The winding-up orders would be affirmed, as they were in keeping with the common law principle of comity. That principle-which required the Cayman court to co-operate with foreign courts and to respect foreign legislation-had not been breached, as the making of the orders could not be said to have made the Delaware court”s job more difficult than it would otherwise be. The making of the orders had not, of itself, given rise to extra issues for determination by the Delaware court as to the validity of the post-petition amendments or who was to speak on behalf of the companies in the Chapter 11 proceedings. The issue as to the validity of the amendments existed independently, since the amendments were alleged to be breaches of the loan facility arrangements and also remained vulnerable to attack under s.99 of the Companies Law (2009 Revision) if winding-up orders were made in the future. Likewise, although the making of the orders had raised the question of who was to speak on behalf of the companies in the Chapter 11 proceedings, it was implausible that any party would be allowed to represent in Chapter 11 proceedings that they were indisputably the voice of the companies. Rather, the Delaware court would wish to consider what weight to accord to any representations purporting to be made on behalf of the companies regardless of whether winding-up orders had been made (paras. 42–43; paras. 46–52).

(2) Further, it was not foreseeable that the issues of whether the limited partnerships had been automatically dissolved, and, if so, whether the limited partnerships had lost their shareholder rights over the German bank, would need to be addressed by the Delaware court. There was indeed a dispute over whether or not the making of the orders had the effect, under Alberta law, of automatically dissolving the limited partnerships. However, given that there was no evidence that the post-petition amendments-whose aim was to avoid an automatic dissolution-had failed, nor any evidence suggesting that, had the limited partnerships been automatically dissolved, the Chapter 11 proceedings would be terminated, it was difficult to see circumstances in which the issue would be raised before the Delaware court. Likewise, since JCF submitted that the entry into Chapter 11 proceedings itself had the effect of terminating the shareholder rights over the German bank, and since there was no reason to think that the...