The Cayman Islands Grand Court recently delivered its judgment in Re
Shinsun Judgment and the Cayman Position
The court considered (a) whether the Petitioner has legal standing to progress a winding up petition (b) whether the petitioner is a contingent creditor; and (c) whether the Petitioner was authorised to progress a winding up petition.
The Court held that the Petitioner did not have standing or authority to progress the proceedings and the Petition was dismissed.
In dismissing the Petition, the Cayman Court made the following findings and key takeaways:
-
The burden of proof is on the Petitioner to prove on a balance of probabilities that it is a "contingent creditor" within Section 94(1)(b) Companies Act (2023 Revision) ("the Act").
- Contingent creditor is not defined in the Act; therefore, the court must refer to the case law.
- As it relates to the context of scheme creditors in a scheme of arrangement, the judge noted that "...beneficiaries have an absolute right to require the Bank to issue definitive notes directly...they are contingent creditors for the purposes of the relevant provision of the Act". 1 He cautioned that this conclusion was case specific and confined to its context. 2
- Unless or until the Petitioner obtains Certified Notes in its name, it cannot establish that it is a creditor, either actual or contingent, to bring itself into a direct contractual relationship with the Company, whether the debt is also properly treated as contingent.
- With regard to the requisite legal standing to progress a winding up petition, the Petitioner must have actual standing at the date of the determination of the petition.
- Referencing the
Shinsun judgment, there is a need for an existing obligation as a contingent creditor; - Consistent with the framework of the global note structure, a class action is to be pursued by the trustee exclusively. Individual bondholders cannot act on their own. If the bondholder cannot sue the Company to enforce the debt, it would appear inconsistent if the bondholder can sidestep such constraint by petitioning for winding up instead; Consistent with the framework of the global note structure, a class action is to be pursued by the trustee exclusively. Individual bondholders cannot act on their own. If the bondholder cannot sue the Company to enforce the debt, it would appear inconsistent if the bondholder can sidestep such constraint by petitioning for winding up instead;
- Duplicity of actions is a risk that must be safeguarded against, in that both the Trustee/Holder and individual bondholders (such as the Petitioner) could pursue winding up relief against the Company at the same time;
- If every individual bondholder is a contingent creditor and can petition for winding up before the Notes have matured with the lack of directly enforceable rights against the Company, this might lead to floodgates and defeat the purpose of the global note structure; and
- As recognised in the
Shinsun judgment, the judge noted that cases on schemes of arrangement are different, as "they concern voting rights on schemes which may affect economic interests, as distinct from locus to present petition which is a more draconian right than a mere voting right for schemes."
More recently,
The Petitioners were both retail investors in
This principle limits an investor holding a beneficial interest in immobilised notes to have a direct claim against the issuer of those notes for breach of contract (unless expressly provided by contract).
In Secure
The Court of Appeal held that if the issue in the case was properly characterised as contractual, the only party to have directly enforceable contractual rights against the issuer was the bearer. The court stated that, as supported by extensive literature, the purpose of immobilised securities is to prevent a direct link between investors and the issuer, so that investors have no contractual recourse against the issuer, unless there is a default in the payment of principal, as the common depositary will never commence proceedings on its behalf.
The legal issue in
The abovementioned principle relating to securities held through a clearing system and the power of receivers is analogous to that of a bondholder progressing a winding up petition as a contingent creditor. As notes are in global form, the holder of the legal title is the common depositary. If there is no evidence from clearing systems that the position has been transferred, the holder does not have beneficial interest and does not have standing, as for example, a contingent creditor, as in the case of
The
The position in
The investor did not dispute that it was not the legal owner of its share of the global bond. It was argued that the term "holder" appearing in the global bond is broad enough to include an "economic interest in the bond....and that such equitable interest is sufficient to constitute as a creditor." 9 The judge did not accept this and held that the global bond did not afford rights to the end investor 10 and that the investor cannot be said to have the requisite contractual relationship with the Company, as is necessary to found the status of contingent or prospective creditor. 11 The investor did not have the necessary locus to present a winding-up petition against the Company by reason of being a creditor; whether contingent or prospective.
The judge noted in the
BVI
In Cithara Global Multi-Strategy SPC v
The fact pattern is similar to the
Conclusion
Justice
"It must be borne in mind that the purpose of the regime of the global note structure is to ensure that the class of bondholders would all act through the trustee as an exclusive channel. Therefore, it does not accord with such design to allow individual bondholders to be at liberty to petition for winding-up when it is accepted that they could not bring any action to directly enforce their debt. More importantly, the position of such bondholders is already safeguarded under the global note structure. Indeed, even in the event where the Notes have not yet matured, their position would be safeguarded by the holder/trustee who may present a winding up petition (whether as actual or contingent creditor) on their behalf. Thus it does not follow from the rationale of the aforesaid Report that bondholders such as P must be afforded standing to present a winding-up petition." 15
The decision and reasoning in the
We believe that the
Footnotes
1. Paragraph 40 of the Shinsun Judgment.
2. Paragraph 98 of the Shinsun Judgment.
3. "All debts payable on a contingency and all claims against the company whether present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company and the official liquidator shall make a just estimate so far as is possible of the value of all such debts or claims as may be subject to any contingency or sound only in damages or which for some other reason do not bear a certain value".
4. Paragraph 40 of the Atom Holdings Judgment.
5. ibid.
6. Paragraph 25 of judgment.
7. Paragraph 35 of judgment.
8. Paragraphs 42 - 49 of judgment.
9. Paragraph 11 of judgment.
10. Paragraphs 28 and 33 of judgment.
11. Paragraph 50 of judgment.
12. BVIHC(COM) 2022/0183. Judgment dated
13. [2013] UKSC 52.
14. Paragraph 153 of judgment.
15. Paragraph 91 of judgment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Ms
Conyers
29th
Central
Tel: 441295 1422
Fax: 441292 4720
E-mail: Gena.smith@codanci.com
URL: www.conyers.com
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