1.All eyes on redemption right

Redemption rights have increasingly been under the spotlight in the past year, as more and more investors contemplate an exit from under-performing investments.

As the redemption of shares involves a return of capital, it is prohibited under Cayman Islands law except to the extent permitted by statute. Section 37 of the Cayman Islands’ Companies Act (the Act) provides:

“(1) Subject to this section, a company limited by shares… may, if authorised to do so by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or the shareholder…

… (3)(c) Redemption or purchase of shares may be effected in such manner and upon such terms as may be authorised by or pursuant to the company’s articles of association.”

Once redemption is permitted by a company’s articles, a company has substantial freedom to set the terms and manner of the redemption. Indeed, the articles may set out a detailed procedure for redemption or they may simply delegate the power to the directors to set the process as they see fit, provided that the natural and ordinary meaning of the articles are followed. It is also necessary to obtain shareholders’ approval if the articles are silent on the process. That being said, pursuant to the Act a share cannot be redeemed or repurchased if (i) it is not paid up fully, (ii) the result would be that there are no shares outstanding; or (iii) the company has commenced liquidation.

The redemption price shall be paid out of either profit of the company, proceeds of a fresh issue of shares, or share premium. Importantly, section 37(6) of the Act imposes a solvency test for redemption; that a payment out of capital by a company for redemption is unlawful unless immediately following the date on which the payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business.

Another important consideration is the effect of redemption on the status of the redeeming investor. In Pearson v Primeo Fund [2017] UKPC 19, the Privy Council held that an investor who had properly redeemed its shares, but had not been paid, will be a creditor of the company in respect of its redemption proceeds. Accordingly, its claim (as a creditor) will rank ahead of the remaining investors in the liquidation of the company, albeit behind those of ordinary creditors. This often leads to, as it happened in Pearson, a “redemption race” to determine ranking of various redeemed investors.

It is therefore important to conduct a thorough analysis of the relevant redemption provisions as well as the financial situation of the company as part of the exit strategy planning. Key questions that we have been asked to advise on include (i) what does it mean by a provision that states that redemption is subject to “legally available cash”; (ii) at what point would the redemption process be completed and hence an investor would have become a creditor; (iii) what steps might be taken by an investor converted creditor to recover the redemption proceeds as a debt; and (iv) whether the approval of a majority of certain shareholders is required for the redemption of certain classes of shares.

Investment funds may be closed end funds, with a fixed investment term, or open-end funds, allowing redemption at regular redemption days. Closed end funds are usually used for private equity investment and structured as limited partnerships, whereas open end funds are usually hedge funds and structured as companies. Redemption issues can arise in relation to both types of fund, typically as a result of liquidity issues.

2. Discovery in Cayman involving documents in the PRC

Discovery is an integral step in litigation in the Cayman Islands. Discovery is given by providing a list of documents in a prescribed form, with inspection of those documents taking place by uploading electronic files to an e-discovery platform. The parties are commonly required to disclose all documents that are relevant to issues in dispute in the proceedings which is in their possession, custody or power. Alternatively, the Court may require parties to provide discovery of documents falling within certain parameters (e.g. date ranges and issues), or which are responsive to key word search strings. ‘Possession, custody or power’ covers not just documents which are physically held by the party but also those which the party has an entitlement to a copy e.g. from an agent. The legal test for relevance includes documents which not only may advance or damage a party’s case, but also which may fairly lead the other to a train of inquiry which may have either of those effects. A party may also apply to the court for further disclosure of specific documents, should they be dissatisfied with the level of discovery given by the other side.

However, certain documents (or parts of documents) may be withheld from disclosure on the grounds of privilege (legal advice privilege and litigation privilege) or public interest immunity. In addition, in proceedings involving litigants in the People’s Republic of China (PRC) it is also common to see documents being withheld on the basis of PRC data security laws.

In the recent judgment of Re New Frontier Health Corporation,^[1] Justice Doyle refused New Frontier’s application for a further extension of time to provide discovery of documents located in the PRC, while acknowledging that New Frontier was not permitted to do so in accordance with PRC law. The Court was referred to various provisions of the relevant PRC data security laws, and having decided that there was an actual risk of prosecution, Justice Doyle had to carry out a balancing exercise between the risk to the company and the importance of the discovery process in the Cayman proceedings.

It appears that the long delays in the provision of discovery by New Frontier was a key consideration which led to this decision. The takeaway is likely that PRC based parties should start the discovery process early, especially to seek advice from PRC lawyers in relation to the data security law and, if possible, co-ordinate with local authorities to manage the timing for the clearance process.

3. RO Regime – two years in, what has happened?

The restructuring officer (RO) regime was introduced in the Cayman Islands in August 2022. Six RO petitions were filed, three appointments made so far. Whilst the Cayman legislation states that the appointment of a RO shall give a company global moratorium, to date, an RO appointment has yet to be examined in any other jurisdiction.

Re Oriente Group Limited^[2] was the first decision made on a RO petition. Justice Kawaley confirmed that a company remains entitled to the appointment of an RO where a winding-up petition has already been filed, and that the winding-up petition should be stayed under the statutory moratorium.

In Re Aubit International,^[3] the Court was asked to consider whether ROs should be appointed for the purpose of a “forensic investigation” into alleged fraud. The RO petition was dismissed on the basis that (a) the statutory pre-condition had not been met; (b) the company had not ascertained its financial position; (c) whilst the creditors had filed a Notice of Appearance in support of the petition, their views were immaterial as the statutory pre-condition had not been met; and (d) the appointment of RO for the purposes of continuing forensic investigations was not a proper use of the restructuring regime.

The introduction of the RO regime has also prompted a revaluation of the “light touch” provisional liquidation. Section 104(3) of the Companies Act provides that application for provisional liquidators (PL) may be made by the company and the Court may appoint a PL if it considers it appropriate to do so. In Re Kingkey Financial International (Holdings) Limited^[4] the Court considered that given the specific circumstances of the case, it is “likely to be of more utility in this case to appoint provisional liquidators than a restructuring officer”. The test for the appointment of PLs upon the application of the company is now broader and less prescriptive and the court will appoint PLs where it considers such an appointment would be “appropriate”.

This development indicates that the RO regime might not be the only course to restructure a distressed company, such flexibility affords practitioners and the Court a wider array of tools to tailor responses to unique corporate scenarios.

4. Permission for service out no longer generally required in BVI

The new BVI Civil Procedure Rules (the CPR) comes into effect on 31 July 2023 for all proceedings commenced after that date. The revision brought in some important changes, in particular the new Part 7 which effectively abolishes for most cases the need to apply to the Court to serve out on a defendant who is not resident in the BVI jurisdiction.

It is an entirely new code in most respects, but it does keep some of the previous features. The major change is that provided the normal modes of service are used and that (i) the claim falls within a relevant jurisdictional gateway, (ii) the case is a proper one for the Court’s jurisdiction, and (iii) that “in the belief of the person signing the certificate, the claim has a good arguable case”.

This will certainly be of great assistance, particularly because of the nature of matters in the BVI, much of which is commenced essentially with an emergency application. It is also important to note that the rules have also expanded the “jurisdiction gateway” to include (i) insolvency proceedings, (ii) cases where an injunction is being sought in aid of foreign proceedings, and (iii) in respect of third part cost orders.

The new rules required a party to certify that it is entitled to serve out without notice, hence where a party is not prepared to do so it may still apply for permission to serve out under the old procedures. One situation that is likely to call for an application for permission to service is where one seeks an order for alternative service.

Our view is that this is a very positive change as it would significantly speed up the commencement of a BVI proceeding, in particular with PRC matters given the need to go through diplomatic channels to effect service in the PRC. It is worth pointing out that defendants who want to challenge the service ay do so, in which case the burden of proof shall rest with the claimant to show that they are entitled to serve the proceedings out of the jurisdiction.

5. When is recognition of foreign awards/judgments really needed?

After obtaining an arbitral award or judgment against an offshore entity, the immediate impulse is to seek recognition in the relevant offshore jurisdiction. However, this approach may not yield significant results, especially if the award holder lacks information about the offshore entity’s assets. The alternative approach would be to seek to liquidate the subject entity, on the basis that an unsettled debt (under the foreign award/judgment).

In reality, enforcement of a foreign award/judgment involves multiple applications to be made to the Court. As a first step, an application is made to the Court for recognition of the foreign award/judgment. Once the recognition order is granted, the award/judgment can be enforced locally, typically by making further applications for charging order or receivership order.

Unsecured creditors often lack information about the company’s financial status, hindering their ability to assess available assets and other creditors. Initiating recognition proceedings in an offshore jurisdiction without knowledge of asset whereabouts can be costly. A recognition order does not compel the company or third parties to disclose asset locations, posing challenges for creditors seeking to seize assets even with a recognized/localized judgment/award.

In cases where a debtor’s financial situation is uncertain, opting for liquidation may be more appropriate. Liquidators have broad powers to secure, realize, and distribute the company’s assets to its creditors. However, since liquidation is a collective remedy for the benefit of all creditors – there would inevitably be a risk that the award/judgment debt is unrecoverable where other creditors of the company take priority in the final distribution.

[1] (FSD 72 of 2022, unreported judgment, 24 April 2024)
[2] FSD 231 of 2022 (IKJ)
[3] FSD 240 of 2023 (DDJ)
[4] FSD 56 of 2024 (JAJ)