Winding Up Petitions: Privy Council poised to make seminal ruling important to Commonwealth

Winding Up Petitions: Privy Council poised to make seminal ruling important to Commonwealth

On 15 and 16 November 2022 in the Cayman Islands, the Privy Council (the “PC”) sitting for the first time in an Overseas Territory of the United Kingdom, heard an appeal from the Cayman Islands Court of Appeal in the case between Family Mart China Holding Co. Ltd. (Respondent) v Ting Chuan (Cayman Islands) Holding Corporation (Appellant) (Cayman Islands) (hereinafter “Family Mart”). The case principally concerns the question whether, in terms of the Cayman Islands Companies Law (“CL”), a petition under section 92 of the CL to wind up a company on the basis of it being just and equitable to do so, was susceptible, either in whole or part, to being characterised as a “matter” for purposes of section 4 of the Foreign Arbitral Awards Enforcement Law 1997 (“FAAEL”) and therefore subject to a mandatory stay pending resolution of the “matter”, either in whole or in part, in accordance with a prevailing arbitration clause.

In recent times, the proposed arbitration of corporate disputes, particularly those between shareholders complaining about the corporate governance of a particular company, has become a hot topic. The arbitrability of corporate disputes have been significantly influenced by a line of authorities starting with Fulham Football Club (1987) Ltd v Richards and another [2011] EWCA Civ 855, which was decided within the context of unfair prejudice proceedings under section 994 of the Companies Act 2006. Consequently, the prevailing English authorities allow one to reliably conclude that shareholder disputes, customarily sought to be resolved through the filing of unfair prejudice petitions under section 994, are arbitrable and by direct implication, not excluded on either of the two accepted grounds for non-arbitrability, that is, either the proposed arbitration is expressly or impliedly excluded by statute, or, it offends against public policy.

An important qualification to the Fulham line of authorities is that an order seeking the winding up of a company, operating as an order in rem affecting third parties, falls within the exclusive jurisdiction of the courts and an arbitrator, putting aside for the moment the arbitrability of the underlying issues that give rise to the relief aimed at a winding up, cannot grant a tangible winding up order as a matter of law.

Family Mart is unique and has progressed to the PC, in that, unlike most, if not all other common law jurisdictions, the Cayman Islands have deliberately refrained from enacting a separate statutory oppression remedy akin to section 994 in England & Wales. Instead, whilst section 92 of the CL serves, first and foremost, as a self-standing remedy for shareholders to have a solvent company wound up, it also acts, as an alternative, as a peremptory gateway requirement for the purpose of obtaining relief under section 95(3) of the CL, which primarily mirrors the relief available to oppressed minority under section 994 in England & Wales i.e. declaratory relief, buy out orders etc. Accordingly, within the context of a shareholder dispute, unlike the statutory landscape in the remainder of the commonwealth, winding up on a just and equitable basis in the Cayman Islands is not merely an alternative form of relief, but rather, the driving reason for filing the petition in the first place. It is this curious distinction in the Cayman Islands, which has brought to the fore, through Family Mart, the slippery question of what the legal position is, or perhaps should be, when a shareholder dispute is sought to be resolved within the context of a just and equitable winding up petition.

In our view, the PC have heard detailed submissions and will ultimately provide a ruling to address, more or less, the following issues:

1.         More broadly speaking:

(a)        to what extent, if any, does the in rem nature of a winding up order negate against an arbitrator deciding the underlying issues as they arise between adversarial shareholders in the context of a just and equitable winding up petition?

(b)       from a procedural and evidential perspective, is the distinction between, on the one hand, a cause of action couched in equity alleging lack of probity leading to loss of confidence, and on the other hand, a cause of action for breach of a shareholder`s agreement, decisive in assessing the arbitrability of the underlying issues arising in a just and equitable winding up petition?

(c)        considering the influence of the New York Arbitration Convention on the legislative incorporation, across the Commonwealth, of the phrase “matter” into either discretionary or mandatory stay provisions in favour of binding arbitration clauses – what is the actual test and/or judicial approach that needs to be taken in deciding what constitutes a “matter”?

2.         Specific to the facts of Family Mart:

(a)        for the purpose of deciding the test and/or judicial approach to the phrase “matter” under section 4 of FAAEL in the Cayman Islands, should the PC follow the most recent approach of the Appellate Court in England & Wales per Republic of Mozambique v Credit Suisse International & Ors [2021] EWCA Civ 329, essentially advocating for a “granular” approach which allows for a substantial “disaggregation” and/or “subdivision” and/or “hiving off” of individual issue; or, the approach adopted in Australia per a minority ruling in Tanning Research Laboratories Inc v O`Brien (1990) 169 CLR 332, essentially advocating for something more than “a mere issue” arising for adjudication, but rather, holistically considered, “some subject matter, some right or liability in controversy”?

(b)       to the extent that a discretion is exercised in deciding arbitrability, does the fact that the subject company is a holding company for the purpose of a joint venture and the arbitration clause in the shareholders agreement binds the only two shareholders, render the potential prejudice to third parties illusory?

(c)        when minority shareholders allege that the majority have procured and facilitated wrongdoing against the minority, through actions taken by the board of directors on behalf of the subject company, is the minority`s grievance and ensuing dispute, as a matter of substance, aimed at the subject company or the majority controlling shareholders?

(d)       as a matter of statutory construction of section 92 of the CL, does it leave room for anyone other than the court to form an opinion and exercise a discretion as to whether it would be just and equitable to wind up a company? If not, from a practical and case management perspective, with due regard to the general purpose of arbitration, would it be desirable for any shareholder to have individual issues arbitrated whilst ultimately still having to proceed to court in order to obtain tangible relief?

From Bermuda`s perspective, considering that sections 7 and 8 of the Arbitration Act 1986, in line with other Commonwealth jurisdictions, also incorporates the New York Arbitration Convention originating phrase “matter” for purposes of adjudicating whether or not court proceedings are to be stayed in favour of arbitration, the PC`s anticipated ruling, insofar it decides general principles as to the test and/or judicial approach towards discerning what constitutes “matter”, will be binding authority in Bermuda and provide welcome clarity to arbitration practitioners and arbitrators in general.

Albeit that Bermuda has its own self standing oppression remedy under section 111 of the Companies Act 1981, which remedy, in accordance with the dicta in Annuity & Life -v- Kingboard [2015] (Bda) LR 97 (confirmed on appeal in Kingboard Chemical Holdings et al -v- Annuity & Life Re et al [2017] CA (Bda) 3 Civ), appears to be closer to section 994 and the line of authorities originating in Fulham – it will nonetheless be very interesting, particularly from a case management perspective, to see how the PC proposes (if it finds that it can do so) that a court approach a just and equitable winding up after the underlying issues had been arbitrated and formed part of an award.

All things considered, the anticipated ruling is sure to have a material impact on the nature of advice to be provided concerning the arbitration of commercial disputes in general and we look forward to getting to grips with any potential developments and changes flowing from the ruling.