In a judgment delivered on 6 October 2023,[1] the Grand Court of the Cayman Islands (Parker J) dismissed an application by the joint voluntary liquidators (“JVLs”) of Port Link GP Ltd (“Port Link”) pursuant to section 124(1) of the Companies Act (2023 Revision) for an order that the liquidation continue under the supervision of the Court, and determined that receivers previously appointed to have conduct of litigation to which Port Link is a party should remain in office in that capacity.
The decision addressed the Court’s discretion to make a supervision order pursuant to section 124 in circumstances where (i) no declaration of solvency was made by the directors of the company following the commencement of the voluntary liquidation (here because the company had no directors at the relevant time) and (ii) there was no good evidence before the Court regarding the company’s solvency. The judgment also provides guidance on what factors the Court will consider when exercising said discretion where there are concurrent officeholders.
Background
The Port Fund L.P. (the “Fund”) is an exempted limited partnership that is a party to ongoing complex litigation in the Cayman Islands.[2] Port Link (in both its personal capacity and as the general partner of the Fund) is a party to various claims and counterclaims by and against limited partners in the Fund, and is also a defendant to crossclaims by co-defendants, one of whom is the ultimate beneficial owner of Port Link. The limited partner plaintiffs in the lead litigation (FSD 236) are two Kuwaiti state authorities, Kuwait Ports Authority and the Public Institution for Social Security (“KPA” and “PIFSS” respectively).
On 15 February 2023, Port Link’s former independent directors resigned due to unpaid fees, leaving Port Link without directors or officeholders. KPA and PIFSS subsequently applied for (among other things) an order to have interim receivers appointed over Port Link. Prior to that application being determined, Port Link’s sole shareholder exercised its statutory right to appoint the JVLs.
In May 2023, Parker J appointed interim receivers over Port Link (which KPA and PIFSS had agreed to fund) for the limited purpose of conducting litigation to which Port Link and the Fund are parties, having decided that, at that point in time, it was not appropriate, necessary or desirable to appoint a liquidator.[3]
As required by section 124(1) of the Companies Act, the JVLs subsequently applied for a supervision order to bring the liquidation of Port Link under the supervision of the Court. The supervision application was supported by numerous creditors of Port Link.
In these circumstances, the Court was required to determine whether Port Link should enter official liquidation (and, if so, the identity of the joint official liquidators) and, separately, whether the receivership should continue.
Judgment
Section 124(1) of the Companies Act states:
“Where a company is being wound up voluntarily its liquidator shall apply to the Court for an order that the liquidation continue under the supervision of the Court unless, within twenty-eight days of the commencement of the liquidation, the directors have signed a declaration of solvency in the prescribed form…”.
The Court noted the authorities concerning its discretion on a supervision application made pursuant to section 124(1).[4] In particular:
- In Re AJW Master Fund II Limited [2011] (1) CILR 363 (“AJW”), the Grand Court (Jones J) stated, obiter, that, where there is no declaration of solvency, “the court must make a supervision order. It has no discretion on this matter.”
- In OVS Capital Management (Cayman) Limited [2017] (1) CILR 232 (“OVS”), the Grand Court (Quin J) held that the absence of a declaration of solvency gave rise to a rebuttable presumption of insolvency, but that the Court retained a discretion, after reviewing all the facts and surrounding circumstances, whether to make a supervision order. In OVS, no declaration of solvency had been provided due to an administrative error however evidence was adduced at the hearing of the supervision application that the company was solvent. Quin J stated that, while the Court had a discretion whether to make a supervision order in the absence of a declaration of solvency:
“The primary purpose of a supervision order is to ensure that an insolvent company is brought under the supervision of the court so as not to allow the insolvent company to continue in the voluntary unsupervised process. Insolvent companies should not be allowed to wind down voluntarily.”
The JVLs and receivers of Port Link adopted a neutral position on the supervision application. However, in light of OVS, the JVLs submitted that where there is no declaration of solvency and no evidence of solvency (as was the case here) the company is presumed insolvent and the Court is bound to make an order appointing official liquidators.[5]
Parker J rejected the submission that the Court has only a narrow discretion consequent upon the rebuttable presumption of insolvency and held that, regardless of whether a declaration of solvency is provided, the Court retains a broad discretion to achieve an outcome which would be in the best interests of the company’s stakeholders and its creditors.[6]
Parker J considered that the Court has analogous powers on the hearing of an application for a supervision order under section 124(1) to those on a winding up petition, and therefore the Court has jurisdiction to do any of the things listed in section 95(1) of the Companies Act, including to dismiss, adjourn or stay the section 124(1) application.[7]
Further, the Court held that the absence of a declaration of solvency did not necessarily mean that the company is insolvent, however Parker J’s finding in this regard appears to be tied to the fact that such absence was inevitable in circumstances where Port Link had no directors during the relevant period.[8]
Relevant considerations
The Court found that there was no benefit to commencing a court-supervised liquidation procedure at this stage, and that it would be just to dismiss the supervision application, with the conduct of the relevant litigation on behalf of Port Link remaining under the control of the receivers.[9]
The following factors were considered by the Court in reaching its conclusion:
- The receivership was supported by a group of limited partners with the substantial economic interest in the Fund/litigation, and there was no real prejudice shown by any creditor to this outcome.[10]
- Placing Port Link into official liquidation would be irreversible, and official liquidators would be subject to various statutory duties which would not be necessary or appropriate in the circumstances applicable to Port Link.[11]
- All claims against Port Link would automatically be stayed in an official liquidation, which was a significant factor in this case because of Port Link’s involvement in ongoing litigation. The Court noted that, while this barrier may have been overcome, any application to do so would cause further delay, uncertainty and expense.[12]
- There have already been significant costs incurred as a result of the appointment of the receivers for the purpose of overseeing the litigation by and against Port Link, and the receivers had undertaken considerable work in that capacity.[13]
- KPA and PIFSS were prepared to continue to fund the receivers in that capacity. It was however said to be unclear how official liquidators would be funded to conduct both the proceedings which involve Port Link and the liquidation.[14] This was despite an indication having been given by KPA and PIFSS shortly before the supervision application hearing that they were willing to fund the receivers in the capacity of official liquidators if so appointed.
Comment
The judgment provides guidance on the Court’s approach to supervision applications under section 124 and the broad range of factors that will be considered by the Court on such applications.
However, it is difficult to reconcile the approaches taken by the Grand Court in AJW, OVS and this case to the existence and scope of the discretion the Court retains on a supervision application in the absence of a declaration of solvency. Whereas the Court indicated, albeit obiter, in AJW that it had no discretion to dismiss a supervision application in the absence of a declaration of solvency, and in OVS that a limited discretion existed if at the time of the supervision application hearing the Court was satisfied that the company is in fact solvent, the approach taken in this case was that the Court “retains a broad discretion to make a decision on an informed basis and in the interests of justice as to how to determine a section 124 petition”.[15] It is therefore likely that, in due course, the Court of Appeal will need to clarify the scope of the Court’s discretion in this regard.
*Campbells represents the second – fourth defendants in FSD 236 and FSD 41, which were not parties to the supervision application.
