The Companies Act (2023 Revision) and HQP Corporation Ltd (in official liquidation)

• Jurisdiction: Cayman Islands
• Judge: Justice David Doyle
• Judgment Date: 07 July 2023
• Docket Number: CAUSE No. FSD 190 OF 2021 (DDJ)
• Court: Grand Court (Cayman Islands)

In the Matter of the Companies Act (2023 Revision)

And in the Matter of HQP Corporation Limited (in official liquidation)

Before:

The Hon. Justice David Doyle

CAUSE No. FSD 190 OF 2021 (DDJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Directions to liquidators in respect of whether shareholders may in principle assert claims against the Company for damages for misrepresentation in relation to their subscription for shares in the Company and how such claims rank in the liquidation of the Company; House of Lords decision in Houldsworth abandoned by Parliament not followed; the effect of English precedent in Cayman Islands law; circumstances in which a Cayman court may decline to follow English precedent

Appearances:

Mr Tom Smith KC of Counsel and Ms Shelley White and Mr Will Waldron of Walkers (Cayman) LLP for the Liquidators

Mr Robert Levy KC of Counsel and Mr Guy Cowan and Mr Harry Shaw of Campbells LLP for the Petitioners

Mr Richard Millett KC of Counsel and Mr Erik Bodden and Dr Alecia Johns of Conyers Dill & Pearman LLP for Access Industries Holdings and AI Autoparts LLC

INDEX

Subject	Page
Introduction	4
Thanks	4
Issue 1 - do the putatively redeeming Preferred Shareholders remain members or become creditors in respect of their unpaid redemption proceeds?	5
Issue 2 - may the Preferred Shareholders in principle assert claims against the Company for damages for misrepresentation in relation to their subscription for shares in the Company?	5
Stare decisis, ratio decidendi and obiter dicta	6-11
English precedent in the Cayman Islands	11-18
English precedent in the Isle of Man	18-25
English precedent in Jersey	25-27
English precedent in Guernsey	27-29
English precedent in Bermuda	29-30
English precedent in Hong Kong	30-32
English precedent in New Zealand	32-33
Summary of the position of precedent in Cayman Islands law	33-35
Houldsworth v City of Glasgow Bank	35-38
Textbook commentary on Houldsworth	38-41
Houldsworth in context	41-42
Soden	43-49
SPhinX	49-50
Direct Lending	50
The treatment of Houldsworth in two other jurisdictions	50
- Televest in Bermuda	50-54
- Sons of Gwalia in Australia	54-63
Further criticism of Houldsworth	63-67
Decision not to follow Houldsworth and reasons for such decision	67-70
Issue 3 - how do the misrepresentation claims rank in the liquidation?	70-78
Costs	78
Apologies for length of judgment	78-79
Order	79

Introduction

1 Martin Trott and Christopher Smith of R & H Restructuring (Cayman) Ltd, the joint official liquidators of HQP Corporation Limited (in official liquidation) (the “Company”), (the “Liquidators”) by way of a Summons dated 11 November 2022 (the “Application”) seek directions from the Court on 3 issues:

• (1) the treatment of share redemption requests made pursuant to the Company's articles and in particular, whether putatively redeeming Preferred Shareholders remain members or become creditors in respect of their unpaid redemption proceeds (“Issue 1”);

• (2) whether the Preferred Shareholders may in principle assert claims against the Company for damages for misrepresentation in relation to their subscription for shares in the Company (“Issue 2”); and

• (3) to the extent misrepresentation claims are available to the Preferred Shareholders, how such claims rank in the liquidation of the Company (“Issue 3”).

Thanks

2 The Court was greatly assisted by the parties and their legal representatives and I place on record my thanks, in order of appearance, to Tom Smith KC for the Liquidators, Robert Levy KC for DCM Ventures China Fund (DCM VIII), L.P., DCM VIII, L.P, DCM Affiliates Fund VIII, L.P., and Jencap Helmet (the “Petitioners”) and Richard Millett KC for Access Industries Hol dings (“Access”) and AI Autoparts LLC (“AI”) and the respective legal teams. It was a real pleasure and privilege to be subjected to their considerable written and oral advocacy skills. I should also thank them for the good, helpful and constructive spirit within which the hearing was conducted. All 3 leaders are a great credit to the legal profession and a fine example to all attorneys of how to assist the court as responsible officers of the court.

Issue 1 - do the putatively redeeming Preferred Shareholders remain members or become creditors in respect of their unpaid redemption proceeds?

3 In respect of Issue 1, I am content to provide a direction that the Liquidators may proceed with the conduct of the liquidation on the basis that the Preferred Shareholders (as such term is defined in the third affidavit of Christopher Smith sworn in support of the Application (the “Preferred Shareholders”)) who submitted redemption requests between 17 February 2021 and 2 July 2021 remain unredeemed shareholders of the Company in respect of the relevant instrument which was the subject of the redemption request.

4 Ultimately the direction in respect of Issue 1 was agreed between the parties but counsel recognised the Court nevertheless needed to be satisfied that it was a proper direction to make. I am so satisfied on the particular facts, on the proper construction of the Articles, in this case. Mr Millett puts the position with admirable clarity and conciseness in his skeleton argument dated 9 May 2023. On the proper construction of the Company's Articles (in particular Schedule A thereto) this is not a case (such as Culross Global SPC v Strategic Turnaround Master Partnership Ltd 2010 (2) CILR 364 or Re Herald Fund SPC 2016 (2) CILR 330 (CICA); 2017 (2) CILR 75 (PC)) where it was possible under the Articles for a redeemer to be fully redeemed (and so cease to be a member) yet remain unpaid and become a creditor for the redemption price. On the contrary, until payment of the redemption price, the redeeming shareholder remains a member: redemption only occurs upon payment by the Company. As Lord Mance, delivering the judgment of the Board in Herald pointed out at paragraph [15], the moment when redemption occurs, and when the prior shareholding interest is extinguished or acquired is a moment which can be defined and shaped by the articles.

Issue 2 - may the Preferred Shareholders in principle assert claims against the Company for damages for misrepresentation in relation to their subscription for shares in the Company?

5 Issue 2 was hotly contested and raised the fundamental issue as to the impact of authorities from other jurisdictions especially England and Wales on the law of the Cayman Islands.

Stare decisis, ratio decidendi and obiter dicta

6 Before turning to the impact of English precedent on the law of the Cayman Islands we should briefly consider the position of stare decisis, ratio decidendi and obiter dicta which are important subjects in common law jurisdictions.

7 Going back to basics it must be remembered that it is only the ratio decidendi of an authority that is strictly binding in the relevant jurisdiction, but well-reasoned high level obiter dicta may be persuasive. A.T.H. Smith in Glanville Williams: Learning the Law (Fifteenth Edition) in respect of the position under English law stated at page 95:

“English courts are obliged to follow previous decisions of English courts within more or less well-developed limits. This is called the doctrine of precedent [or stare decisis; let decided things stand]. The part of a case that is said to possess authority is the ratio decidendi, that is to say, the rule of law upon which the decision is founded.”

8 At pages 105-106 the following is added:

“In contrast with the ratio decidendi is the obiter dictum. The latter is a mere saying “by the way”, a chance remark, which is not binding upon future courts, though it may be respected according to the reputation of the judge, the eminence of the court, and the circumstances in which it came to be pronounced … The reason for not regarding an obiter dictum as binding is that it was probably made without a full consideration of the cases on the point, and that, if very broad in its terms, it was probably made without a full consideration of all the consequences that may follow from it; alternatively the judge may not have expressed a concluded opinion.”

9 Gamer in The Law of Judicial Precedent (Thomson Reuters 2016) (“Gamer”) deals with the distinction between ratio decidendi and obiter dicta at page 44:

“The Holding [ratio decidendi] of an appellant court constitutes the precedent, as a point necessarily decided. Dicta do not: they are merely remarks made in the course of a decision but not essential to the reasoning behind that decision”.

10 Sir Christopher Clarke, the President of the Court of Appeal of Bermuda in The Corporation of Hamilton v The Attorney General [2022] CA (Bda) Civ 6, stated:

“90. It is sometimes suggested (and was suggested by Mr Myers) that the question whether a decision on an issue forms part of the ratio depends on whether the decision was necessary in order to produce the result which the Court reached. In my judgment this is too simplistic a view.”

And added:

“91. In order to decide what was the ratio of any decision it is necessary, in my view, to examine the route which the Court took in order to see whether the point in issue was an essential part of the Court's reasoning.”

11 Neil Duxbury in The Nature and Authority of Precedent (Cambridge University Press 2008) (“Duxbury”) at pages 12-13 states:

“… precedents set by courts do not merely claim the attention of, but actually bind, other courts. This is the doctrine of stare decisis - i.e., earlier judicial decisions must be followed when the same points arise again in litigation.”

12 Duxbury at pages 113-116 deals with the topic of “Distinguishing” and the following are extracts from his treatment of...