Re Orient Petroleum

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 18 December 2009
• Court: Grand Court (Cayman Islands)
• Date: 18 December 2009

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF ORIENT PETROLEUM INTERNATIONAL INCORPORATED

Ms. S. Corbett for the company.

Legislation construed:

Grand Court Rules, O.102, r.20(3): ‘The summons under paragraph (2) shall be supported by an affidavit which shall-

(a) describe the purpose and effect of the proposed scheme;

(b) contain such information as may be necessary to enable the Court to determine whether it should convene class meetings and, if so, the composition of the classes;

(c) contain such information as may be necessary to enable the Court to determine whether the proposed time and place of the Court meeting(s) and the method of giving notice is appropriate in all the circumstances.’

O.102, r.20(4)(e): The relevant terms of this paragraph are set out at para. 4.

Companies-arrangements and reconstructions-confirmation by court-under Grand Court Rules, O.102, r.20 petition to be supported by affidavit and explanatory memorandum disclosing commercial purpose and effect of arrangement-transparency required to enable court, shareholders and creditors to make fully informed decision on merits-court to be satisfied that full and frank disclosure made, including audited financial statements

The petitioner company sought an order under s.86 of the Companies Law (2009 Revision) sanctioning a scheme of arrangement and for an order that a meeting of its shareholders be convened.

The scheme proposed to merge the business, undertakings and assets of the petitioner with its wholly-owned dormant subsidiary and then subsequently to dissolve it. The petitioner had a net asset value of nearly $160m. while the subsidiary company was only a shell company with no material assets or liabilities. As part of its application, the petitioner presented a supporting affidavit from one of its directors and an explanatory statement in order to comply with the requirements of O.102, r.20 of the Grand Court Rules. The statement indicated that the transaction aimed to (a) simplify the overall group structure; (b) provide a combined stronger profile for the companies; (c) make a single, more tax-efficient entity; and (d) reduce costs and create value. The affidavit failed to give details of the ultimate beneficial owners of the company and no proper financial statements were provided to the court.

The court considered whether, on the basis of the supporting material, it would approve the proposed scheme.

Held, dismissing the petition:

The petition was not supported by adequate evidence since the true commercial purpose and effect of the scheme had not been credibly explained in the supporting affidavit, as required under Grand Court Rules, O.102, r.20(3) nor in the explanatory memorandum as required under r.20(4)(e), both of which appeared to be positively misleading. The supporting affidavit had not fully disclosed the ownership of the company, the audited financial statements, group structure and trading history of the companies were not properly set out, and, given that the subsidiary company had no assets and there was no explanation why it had ceased to carry on business, the evidence seemed inconsistent with the aims of the scheme outlined in the explanatory statement. The Rules required transparency and for the shareholders, creditors and the court to be fully informed in relation to the scheme so that they could make an informed decision on its merits. Moreover, even though this was not a creditors” scheme, the creditors would still be entitled to know the company”s motivation for the proposed arrangement as they had a right to be heard on the petition and because of its possible prejudicial impact upon them. The petitioner was required to make a full and frank disclosure and since it appeared that the real commercial purpose of the scheme had not been revealed to the court-the amalgamation of the petitioner with a shell company seemed commercially nonsensical and unlikely to strengthen the company, reduce costs, create value or improve tax efficiency-the petition would be dismissed (paras. 8–9; paras. 14–21; para. 24).

1 JONES, J.: Orient Petroleum Intl. Inc. (‘OPII’) appears to carry on a substantial oil and gas exploration business in Pakistan. It was incorporated in the British Virgin Islands on December 29th, 2004 and was ‘transferred by way of continuation’ to the Cayman Islands with effect from November 24th, 2009. Shortly thereafter, on December 4th, 2009, OPII presented a petition under s.86 of the Companies Law (2009

Revision) for an order sanctioning a scheme of arrangement between the company and its shareholders. OPII now applies by its ex parte summons for an order that a scheme meeting of shareholders be convened and held in Geneva, Switzerland on January 6th, 2010. The petition and ex parte summons are supported by an affidavit sworn by Rustom B. Kanga who describes himself as ‘a director and the secretary’ of OPII and gives his address as an office building in Geneva. He does not disclose his professional qualifications or business background and experience. Nor does he disclose what, if any, executive management role he performs within the OPII Group. However, he does assert that he is ‘intimately acquainted [with] the affairs of [OPII].’

2 In my judgment, this...