Jun 2024
In a very recent judgment in the wake of the Abraaj Group fallout, the Grand Court of the Cayman Islands refused to strike out a just and equitable winding up petition and, in the process, analysed the effect of a purported “non-petition clause”.
Section 95(2) of the Companies Act provides that:
“The Court shall dismiss a winding up petition or adjourn the hearing of a winding up petition on the ground that the petitioner is contractually bound not to present a petition against the company.”
The decision makes clear that, when drafting and negotiating these types of contractual provisions, the use of generic or catch-all language should be avoided.
A link to the full judgment is here.
Strike-Out Attempt
As part of a strike-out application, it was submitted that the winding-up petition had been presented in breach of a term of the relevant Shareholders Agreement (the “SHA”).
Schedule 4 of the SHA provided that:
“The Company covenants that and each Shareholder undertakes to exercise all his powers as a shareholder or otherwise so as to procure that none of the following matters shall be undertaken without the consent of Abraaj and the Original Shareholders. The Shareholders covenant that the following matters shall not be undertaken without the consent of Abraaj and the Original Shareholders (it being acknowledged by each party that none of the following matters are within the competence of the Board)… Liquidation: The solvent liquidation, winding-up or dissolution of the Company or KESC.”
The strike-out applicants argued that their application turned on a discrete legal point that could and should be determined summarily. They submitted that section 95(2) is drafted in mandatory terms and that the petitioner had agreed not to present a petition against the company.
On the other hand, the crux of the petitioner’s submissions was that, on the proper construction of Schedule 4 of the SHA, there was no contractual bar which precluded presentation of a petition. Second, if they were wrong about that, and there was a contractual bar, the bar would not be subject to and prohibited by section 95(2) because that provision was directed at creditor petitions and not shareholder petitions.
The petitioner also asserted that an agreement by a shareholder to contract out of its statutory right to petition was, at the time at which the SHA was entered into, unlawful both under the proper law of the SHA and under the law of the company’s place of incorporation (i.e. Cayman Islands law). The petitioner further submitted that the parties cannot – absent extremely clear and unequivocal language – be taken to have intended to enter into an agreement to achieve something which was a legal impossibility under the law of the contract and there was no clear and unequivocal language in Schedule 4 which could properly lead the court to such a conclusion.
The Decision
The Court accepted that, on a proper construction of Schedule 4, and the definition and reference to liquidation in reserved matters set out therein, the petitioner did not agree that it was prohibited from presenting a winding-up petition.
The Schedule 4 covenant refers to, and is intended to refer to, the type of winding-up proceedings regulated and dealt with by the Articles.
The only winding up discussed and referred to in the Articles is a voluntary winding up and, in the absence of any language in the SHA which refers to a winding up by the court, the reference to winding up in Schedule 4 is to be understood as a reference to a voluntary winding up.
Further, the Court was of the view that the Schedule 4 covenant was a provision relating to corporate governance and the regulation of the powers given to the shareholders by the SHA and the Articles.
Key Takeaway
In reaching his decision, Segal J provided the following practical guidance to parties to contracts and those drafting them:
“A covenant covering a winding up petition on the just and equitable ground would need to be clearly and explicitly expressed. The Court should only take away the important statutory right if clear words are used.” (emphasis added)
In order to take the benefit of section 95(2) protection, the key takeaway is that it is best practice to list all of the precise actions a party is prohibited from taking that could lead to winding up of a company, e.g. voting for winding up, presenting a petition on just and equitable grounds or seeking a winding up by the court.
In an earlier decision in Rhone Holdings, the Cayman Islands Court of Appeal held that the terms of section 95(2) apply to companies, as well as exempted limited partnerships, and it is plain that the provision is not contrary to public policy. Accordingly, it remains possible to invoke and rely upon a “non-petition clause”. However, this more recent decision serves as a reminder of the need to be careful and precise when drafting restrictive terms of this sort.