In this article, the authors will discuss the reasons for the CICA having concluded that, rather than being the “paradigm case” of quasi-partnership which the Grand Court had held it to be, at the material times, Virginia Solution was not a case of quasi-partnership at all. The decision demonstrates the paramount importance of examining the extent to which shareholders have sought to regulate their relationship contractually in deciding whether that relationship amounts to a quasi-partnership; that where comprehensive contractual arrangements have been made, more superficial aspects of their relationship are unlikely to justify equitable intervention.

The authors will then share their observations as to whether the current state of Cayman Islands jurisprudence regarding the availability of alternative remedies is consistent with the presumed legislative intention behind the statutory regime, or whether the law previously took a wrong turn in Camulos Partners v Kathrein [2010] 1 CILR 303 and unnecessarily limited the Court’s jurisdiction to provide relief to shareholders in circumstances which fall short of justifying a winding up.

Overview of the Quasi-Partnership Basis for Winding Up

The quasi-partnership concept in company law reflects a recognition that the relationship between shareholders of certain companies may be analogous to a partnership, founded upon mutual trust and confidence and in which their respective rights, expectations and obligations have not been submerged into the company structure. In such cases, the corporate documents will not tell the whole story, and the nature of the quasi-partnership relationship nonetheless makes it unjust or inequitable for some faction to insist on its strict legal rights.

Where a quasi-partnership relationship exists between the shareholders of a company, it is also trite law that an irretrievable breakdown in their relationship of mutual trust and confidence will justify a winding up of the company on the just and equitable ground, at least so long as the shareholder(s) seeking the winding up are not solely to blame for the irretrievable breakdown – and subject to the possibility that there may be some more appropriate alternative remedy, e.g. a buyout order. However, the corollary is that where there is no quasi-partnership, an irretrievable breakdown in trust and confidence will not, in and of itself, justify a winding up.

The Crux of the Dispute in Virginia Solution

The dispute between the petitioner and respondent in Virginia Solution arose several years before the just and equitable winding up proceedings were commenced, and within just a couple of years after they had become the last two remaining shareholders of the company. The petitioner complained in the winding up proceedings that it had lost trust and confidence in the respondent as its quasi-partner because the respondent had repeatedly opposed (and thus effectively vetoed) the payment of dividends out of the company in accordance with its Dividend Policy, in amounts which had been recommended by the company’s actuary. As it happens, even the respondent (appellant) itself had given evidence to the effect that it was unrealistic to think that the parties could go on and continue to build, develop and strengthen the company.

Although the petitioner had previously sought to arbitrate the dispute between 2017 and 2018 in accordance with the Participation Agreement described below, it apparently abandoned its efforts when the respondent asserted that the declaration of dividends was in the discretion of the company’s board and that an arbitrator would thus have no power to make an effective award.

The Appellate Decision on Quasi-Partnership

The CICA reviewed the history of the company in detail. It had been incorporated on 29 June 2004 on behalf of five Virginia-based non-profit healthcare providers (following the collapse of a Virginia-based professional liability insurer) with a view to it operating as their captive insurance company. However, from 2014, only the petitioner and the respondent remained.

As the CICA went on to find, in agreement with the trial judge, the company had been run in its early years as a quasi-partnership, with the shareholders’ relationship “governed not merely by [its] constitutional documents but by implicit obligations of good faith”. The CICA further observed that:

“There was ample material on which the judge could find that the founding members embarked on the enterprise in the hope or expectation that it could be made to work through the goodwill of the persons representing the participants, notwithstanding the immaturity of the company’s constitutional documents and despite a considerable lack of certainty as to the strict legal position. Viewed in that light, the factors relied on by the judge – the fact that the principals were known to each other, that the founding members would have an equal voice in the management of the concern regardless of their capital contributions, the fact that they regarded each other as “partners” – indicated a substantial element of trust and confidence that an essentially informal arrangement could be made to work. It is in just such a situation that equity may feel the need to step in if the trust and confidence breaks down”.

However, it went on to explain that the shareholders’ relationship was fundamentally altered in May 2009, when the company’s board resolved to implement the Participation Agreement, Dividend Policy and certain amendments to the Articles of Association. Those steps had been taken in anticipation of a new shareholder coming into the company, and the inevitable inference was that the existing shareholders (whose representatives comprised the board) had recognised that their previous informal arrangements could not safely continue beyond that point.

The CICA described the Participation Agreement, made between the shareholders and the company itself, as the “key document”, noting that it recited the shareholders’ desire “to set forth their mutual covenants and agreements regarding the operation of the Company and its insurance program and certain other matters”, and therefore “deal[t] with a wide variety of matters relating to acquisition and termination of membership, dividends and the operation of the Company’s affairs”. Overall, it “represent[ed] an attempt to provide a comprehensive consensual regime for participation by the members in the Company’s affairs”.

The CICA highlighted that the provisions of the Participation Agreement were expressly to prevail in the event of any conflict with the company’s articles of association, and that it contained both:

an arbitration clause, which could have been invoked given the prima facie failure of the directors to act in the company’s best interests, to seek an award compelling the company to declare dividends (as the petitioner had previously sought to do); and
an entire agreement clause, which the CICA regarded as “a powerful indication that the members thought and intended that the rules governing the relationship between themselves, and between them and the Company, were exclusively contained in the Participation Agreement and related documents”.

The CICA thus found it “striking” that the judge had only recited the provision of the Participation Agreement relating to dividends (although this appears principally to have been due to the way that each side had presented its case at trial). It noted that, as a matter of principle, just as a company may become a quasi-partnership post-incorporation, it may also commence life as a quasi-partnership but cease to be one – and the time at which the acts which the petitioner complained of occurred was therefore important (one might say fundamentally so). Having regard to the effect of the Participation Agreement and the context in which it was implemented, the CICA held that, once that agreement was put in place, “there was no scope for the superimposition of equitable considerations”. Moreover:

“It was not permissible to revert to the basis on which the Company was initially established and ignore the subsequent formalisation of the parties’ relationship”.

With the CICA having reached the conclusion that the company was not a quasi-partnership at the material times, as noted above, it was in principle immaterial whether the parties’ relationship of trust and confidence had irretrievably broken down. Nonetheless, the CICA shared its view that the judge had been entitled to conclude that the parties’ failure to agree on the distribution of dividends over
a lengthy period of time “was enough to indicate an inability to cooperate on a fundamental aspect of the Company’s affairs”; and that it would thus have upheld the finding that there had been an irretrievable breakdown of mutual trust and confidence between them, had the issue remained live.

It follows that, had the judge been correct to find that the relationship was one of quasi-partnership, the case for winding up on the just and equitable ground would have been established, subject to the question of the availability of a more appropriate alternative remedy, to which we turn below.

The key takeaway from this aspect of the decision in Virginia Solution is therefore that, when one is considering whether to seek a just and equitable winding up on the quasi-partnership basis, the contractual arrangements between the shareholders will be of paramount importance. If the shareholders have implemented a complete contractual code to govern their relationship, more superficial matters, such as whether they referred to each other as “partners” or handled their affairs with a certain degree of informality, are unlikely to justify any judicial intervention on the basis of equitable principles.

The Availability of Alternative Remedies

Since 2007, s.95(3) of the Companies Act has given the Court the power to grant the following forms of relief as an alternative to making a winding up order upon a shareholder’s petition on the just and equitable ground:

an order regulating the conduct of the company’s affairs in the future;
an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do;
an order authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct; or
an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of the purchase by the company itself a reduction of the company’s capital accordingly.

The CICA referred in Virginia Solution to its decision in Camulos (supra) on the interpretation and effect of s.95(3), in which it previously held that:

the availability to a petitioner of an effective alternative remedy would be a ground for restraining a petition on the just and equitable ground;
but also that “the gateway to an [alternative] order under s.95(3) of the [Act] is that the court is satisfied that (but for that order) it would be “just and equitable” to wind up the company”.

In Virginia Solution itself, the CICA observed that the judge had failed – after determining that the petitioner had established a prima facie case for winding up – then properly to consider whether any of the alternative remedies provided by s.95(3) was a more appropriate method of dealing with the situation. On that basis, the CICA held that the first instance judgment could not have been upheld even if the judge had been right that a case for a just and equitable winding up otherwise existed.

But the more important question from a jurisprudential and jurisdictional perspective, which did not arise in Virginia Solution and which remains (either to be addressed by the Privy Council in an appropriate case or by the Legislature in due course), is this:

Why should it be necessary for a shareholder to satisfy the Court that the most draconian option of winding up the company would be appropriate before it can be granted any less draconian form of relief pursuant to s.95(3)?

In Camulos, the CICA referred to the Law Reform Commission report which explained the intention behind the (then proposed) enactment of s.95(3)-(6) of the Companies Act, namely to introduce an equivalent to ss.459-461 of the English Companies Act 1985, which had given the English courts the power to grant relief “on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of… some part of its members (including at least himself)…” However, the CICA in Camulos considered that s.95(3)-(6) did not reflect that intention, since those subsections contained nothing which corresponded with the “unfair prejudice” language of s.459 cited above.

Chadwick P (with whom the other Justices of Appeal concurred) stated that:

“It is, of course, correct that, if [the just and equitable] ground is made out, the orders which the court may make (under s.461(2) of the 1985 Act) are similar to the orders which can be made under s.95(3) of the revised Law. But the gateway to an order under s.95(3) of the Law is that the court is satisfied that (but for that order) it would be “just and equitable” to wind up the company. As Vos, J.A. explained in this court in In re Strategic Turnaround Partnership Ltd. (10) (2008 CILR 447, at para. 59):

“…[E]ven when the new s.95(3)… comes into force, it will allow a statutory remedy for minority shareholders by, for example, ordering the purchase of shares, but it will do so in the context of a contributories’ ‘just and equitable’ petition; there will, even then, be no free-standing unfair prejudice petition in the Cayman Islands””;

And further observed that:

“When Vos, J.A. observed (2008 CILR 447, at para. 58) that “where there is no unfair prejudice statute, allowing a minority to seek the relief he really seeks—namely to be bought out… the ‘just and equitable’ ground . . . has more work to do,” he was doing no more than to point out that, in the absence of a provision equivalent to s.459 of the UK statute, it was necessary to rely on the “just and equitable” ground in such a case”.

The authors would however respectfully suggest – indeed with the greatest respect to those eminent Justices of Appeal – that the analysis in Camulos, and the obiter remarks in Strategic Turnaround prior to the enactment of s.95(3), dwelled too much on the Legislature’s implicit decision not to introduce a free-standing unfair prejudice remedy in concluding that the Court had to be satisfied that a winding up was appropriate before it could grant any such alternative remedy. It may be inferred that the CICA in both of those early decisions on the interpretation and effect of s.95(3) had the statutory predecessor to the unfair prejudice jurisdiction in mind, namely s.210 of the Companies Act 1948, which provided inter alia that:

“Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself)… may make an application to the court by petition for an order under this section.
If on any such petition the court is of opinion—
1. that the company’s affairs are being conducted as aforesaid; and
2. that to wind up the company would unfairly prejudice that part of the members, but otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up;

the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company’s affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company’s capital, or otherwise” (emphasis added).

As French, Applications to Wind Up Companies (4th Ed.) explains at [8.321], that section provided that, if a shareholder could prove that its company’s affairs were being conducted in a manner oppressive to that shareholder (and possibly others), and the court found that the oppression justified the making of a winding-up order, then it could instead make an alternative order.

On a plain reading of s.95(3) of the Cayman Islands Companies Act itself, that subsection does not, however, purport to impose any similar threshold requirement that the Court be satisfied that a winding up order would otherwise be appropriate before it may proceed to grant any alternative remedy. The only order which, by virtue of s.92(e), the Act positively states the Court cannot make in such a proceeding without concluding that it is just and equitable that the company in question be wound up is the winding up order itself.

It is thus respectfully submitted that the better interpretation and view of the effect of s.95(3) would have been that a just and equitable winding up petition may simply be a procedural vehicle for a shareholder to seek such alternative remedies, even if, in some cases, the need to plead the grounds for a just and equitable winding up would result in an element of artificiality. The consequence of the position established by Camulos and reiterated in subsequent decisions of the CICA – first requiring satisfaction that a winding up would be appropriate – is, instead, that the Court has considerably less jurisdiction to provide relief to unfairly prejudiced shareholders.

Although, as noted above, the Camulos position will remain good law unless or until it is overruled by the Privy Council or by further legislative intervention, it is to be hoped that one or the other will occur before too long, so that the original legislative intent can be carried out and a more rational approach can be taken regarding access to the alternative remedies provided by s.95(3).