By Aristos Galatopoulos and Luke Stockdale From Maples and Calder

Arbitration, choice of forum clauses and winding up proceedings in the Cayman Islands: which takes precedence?

As in many other jurisdictions, there are statutory provisions in the Cayman Islands requiring the courts to stay proceedings in favour of arbitration where a valid arbitration agreement exists which applies to the subject matter of the proceedings. Similar principles apply in the case of foreign exclusive jurisdiction clauses.

Several recent decisions have helped to clarify the relationship between the courts’ exclusive statutory jurisdiction to wind up companies and exempted limited partnerships (“ELPs”) and the ability of a party that opposes a winding up petition to enforce a prior arbitration or foreign exclusive jurisdiction agreement which is said to require the petitioner to have their claim determined in another forum.

Companies and ELPs are two legal vehicles frequently established in the Cayman Islands. Disputes between their stakeholders and claims against them by creditors commonly find their way before the courts in the form of winding up proceedings. In addition, winding up proceedings, and related claims for alternative relief under section 95(3) of the Companies Law (2013 Revision), have greater prominence in the Cayman Islands than in some other common law jurisdictions as a way for minority shareholders and limited partners to assert their rights, given the absence of a standalone unfair prejudice remedy in the Cayman Islands. It is therefore important in the Cayman Islands that there is a clear delineation between the types of disputes which parties can agree to have resolved by arbitration or a foreign court and those which fall within the courts’ exclusive winding up jurisdiction.

The approach that the courts have taken to this issue in relation to petitions by creditors on the grounds of insolvency differs somewhat from the approach in relation to petitions by shareholders or limited partners under the court’s ‘just and equitable’ winding up jurisdiction. Each will be considered separately.

Creditors’ petitions

It is well established that the courts’ winding up jurisdiction cannot be invoked by a creditor in respect of a debt which is disputed on bona fide and substantial grounds. A winding up petition based on a disputed debt is liable to be dismissed as an abuse of process.

The first of the recent decisions to consider this issue in the context of an arbitration clause was Re Times Property Holdings Limited [2011] CILR 223. A creditor petitioned to wind up a company on the grounds of insolvency. The company argued that the debt was disputed in light of arbitration proceedings underway in Hong Kong where the company’s indebtedness to the creditor was to be determined. The court referred to the above principles relating to disputed debts and to the principle that parties should be held to their bargains. Although satisfied that there was a genuine dispute as to the debt, Foster J gave as his primary reason for staying the petition that:

“…it is not appropriate for this Court, even if minded to do so, to deprive the Company of putting its case and pre-judging the issue by seeking to determine the Company’s dispute of the alleged indebtedness has no real substance. It seems to me that that question is for the arbitral tribunal in Hong Kong…”

By way of alternative conclusion, the judge found that, if he was wrong to adopt the above approach, the company’s dispute of the alleged debt was on bona fide and substantial grounds. Foster J’s primary conclusion suggests that the mere existence of proceedings in another forum, or a contractual right to have disputes resolved in another forum, is sufficient for the court to dismiss a winding up petition without having to determine whether the grounds of dispute are bona fide and substantial. In our view this would be an unorthodox approach to adopt and, as will be seen below, the courts have moved away from this position in subsequent decisions.

The same issue arose shortly afterwards in Re Duet Real Estate Partners 1 LP (Unreported, Grand Court, 7 June 2011). In that case, a Cayman Islands ELP (Duet) sought an injunction to restrain the presentation of a winding up petition against it on the basis that there was a genuine dispute about two debts said to be owed to a Luxembourg company (ESO) which had financed a resort project in Saint Barthélemy. The agreement in question contained a London arbitration clause and Duet had commenced arbitration proceedings. The basis of the alleged dispute over the debts was that Duet and ESO had made an oral agreement by which ESO had exchanged its rights under the financing documents for an equity interest in the resort project. Jones J found this argument to be “thoroughly disingenuous” in light of the contemporaneous documentary evidence which was inconsistent with any such oral agreement. The court found Duet’s argument, that there was a genuine dispute over the debts, to be nothing more than a delaying tactic and dismissed its application.

The court did not mention the decision in Re Times Property Holdings Limited in its judgment. It is however clear that Jones J considered that that court was required to assess whether there was a genuine dispute over the debts and was not prevented from doing so by the existence of the arbitration clause or the arbitration proceedings in London. Jones J reached the same conclusion on similar facts in the later decision Re Ebullio Commodity Master Fund L.P. (Unreported, Grand Court, 24 May 2013).

Two further decisions have also adopted the approach of Jones J in Re Duet and Re Ebullio rather than the primary reasoning of Foster J in Re Times Holdings Limited. In Re SRT Capital SPC Ltd (Unreported, Grand Court, 22 November 2013) Foster J again had to consider this issue in the context of a petition by Morgan Stanley and Co International PLC against a Cayman Islands company, SRT Capital SPC Ltd, based on a debt alleged to be due from SRT pursuant to a swap transaction. The swap transaction documents contained an exclusive jurisdiction clause in favour of the English courts. SRT argued that there was a dispute over the debt by virtue of alleged fraudulent misrepresentations by Morgan Stanley and that certain provisions of the transaction documents were unenforceable. SRT argued that it was contractually entitled to put these arguments to the English court.

Foster J referred to his decision in Re Times Holdings Limited and noted that “[t]he circumstances in [that case], upon which reliance was placed, were also different”, although without giving any explanation as to why. The judge went on to note that it was “clear anyway that in that case, in which there were clearly factual issues, [he] gave consideration to whether the company’s grounds for disputing the alleged debt were substantial”. Foster J then considered whether there was a genuine dispute over the alleged debts and concluded that there was, dismissing the petition.

Finally, in Huawei Technologies v Hits Africa (Unreported, Grand Court, 29 November 2013), a case involving a debt alleged to be due to the petitioner for the provision of telecom equipment and services to a Cayman Islands company pursuant to an agreement that contained an arbitration clause, Quin J expressly adopted the approach of Jones J in Re Duet and Foster J in Re SRT Capital. On the evidence before the court, Quin J held that there was no genuine and substantial dispute over the debt and made an order winding up the company.

Petitions under the court’s ‘just and equitable’ jurisdiction

Under the provisions of the relevant legislation, companies and ELPs can be wound up where “the court is of the opinion that it is just and equitable” to do so. There is no single definition of the circumstances that make it just and equitable for the court to make a winding up order, but they have been held to include where the purpose for which a company or ELP was established is no longer capable of being achieved, and where there has been a justifiable loss of trust and confidence in management.

Where a winding up petition is filed against a company or ELP on just and equitable grounds and its constitutional documents contain an arbitration clause, a similar question to the above arises as to the circumstances in which the court should decline jurisdiction in favour of arbitration.

That issue arose in Re Cybernaut Growth Fund LP. (Unreported, Grand Court, 23 July 2013) which concerned a petition for the winding up of an ELP by limited partners representing 49.96% of limited partnership interests, on the grounds of a justifiable loss of trust and confidence in the management of the ELP. The limited partnership agreement contained a New York arbitration clause and the general partner and majority limited partner applied to the Cayman Islands court to have the petition stayed or struck out on the grounds that the dispute had to be determined by arbitration in New York.

The issue before the court required consideration of comments made by Patten LJ in the English Court of Appeal decision Fulham Football Club (1986) Ltd v Richards [2012] Ch 333. Although confirming that an arbitral tribunal does not have jurisdiction to make a winding up order, the Fulham decision gave rise to the question of whether the tribunal could decide matters which might form the basis for a winding up order, but without going so far as to actually make a winding up order.

The court held that a just and equitable winding up petition such as that before it was not arbitrable for two reasons. First, a winding up order is capable of affecting third parties, whereas the source of an arbitral tribunal’s power is contractual and so its orders only bind the contracting parties. Secondly, a dispute as to the identity of the liquidator to be appointed involves consideration of matters of public interest which are only suitable for determination by the court.

The court held that a stay of winding up proceedings in favour of arbitration would only be appropriate where the petition included either discreet inter partes claims, or matters which could be tried as preliminary issues, falling within the scope of the arbitration agreement. As neither situation applied in this case, the court concluded that the petition was non-arbitrable and dismissed the stay application.

It now seems clear as a matter of Cayman Islands law that a party opposing a creditor’s winding up petition by relying on an arbitration or foreign exclusive jurisdiction clause must show that it has bona fide and substantial grounds for disputing the debt before it can have the petition dismissed. The weight of authority indicates that the Cayman Islands courts must test the submission that they lack jurisdiction to make winding up orders by asking whether there is in fact a genuine dispute over the debt, or whether the choice of forum provision is being invoked for purely tactical reasons. Similarly, the Cayman Islands court has shown that it will take a robust and proactive approach to jurisdiction when faced with a just and equitable winding up petition, as set out in the Cybernaut judgment.

These decisions are welcome as providing some clarity as to the relationship between the Cayman Islands courts’ exclusive winding up jurisdiction and contractually agreed methods of dispute resolution. It is hoped that they will reduce the opportunity for parties to employ jurisdictional arguments to delay or frustrate appropriate substantive relief being granted where it is appropriate.

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.

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