Tag Archives: Shareholders Cayman Islands

Shareholder disputes can arise from a variety of causes ranging from mismanagement and lack of transparency to personal fallouts among business partners. These issues are particularly acute in privately held companies, where relationships often blur the line between personal and professional. When such disputes escalate beyond informal repair, the Companies Act (2025 Revision) (the “Act”) offers a critical legal recourse: the ability to petition for the winding up of the company on “just and equitable” grounds.

In this article HSM Partner Kerrie Cox examines the legal framework governing “just and equitable” winding up petitions. Detailing the key principles that courts consider, the procedural steps involved, and the implications for shareholders seeking to exit a deadlocked or dysfunctional business. Understanding this remedy is vital for shareholders facing irreconcilable disputes, offering a clear, albeit final, path toward resolution.

What does ‘just and equitable’ mean?

Section 92(e) allows any contributory – typically a shareholder – to petition the court to wind up a company on the basis that “it is just and equitable that the company should be wound up.” But what does this standard actually entail?

The phrase “just and equitable” is not exhaustively defined in the Act, which gives the Grand Court wide discretion to determine whether it is fair and reasonable to wind up a company in a particular case. While each petition is assessed on its own merits, the courts have recognised several recurring grounds that may justify a winding up on a just and equitable basis:

  1. Loss of Substratum

This occurs where the company can no longer achieve the purpose for which it was originally formed. If the core business objective fails or becomes impossible to carry out, a shareholder may argue that continuing the company no longer serves any meaningful purpose.

  1. Deadlock

In companies with two or a few shareholders (particularly where each holds equal control), a deadlock may arise if the parties are unable to agree on essential business decisions. If there is no mechanism in the company’s constitution to resolve such disputes, and the impasse paralyses the business, this can justify a winding up.

  1. Lack of Probity or Mismanagement

If those in control of the company (typically directors or majority shareholders) act in a way that is oppressive, fraudulent, or in breach of their fiduciary duties, the court may intervene. Examples include diverting business opportunities, misusing company funds, or excluding minority shareholders from decision-making.

  1. Loss of Mutual Trust and Confidence

Especially relevant in quasi-partnerships or closely held companies, this ground applies when a breakdown in personal relationships makes it impossible to continue operating the business in the manner initially intended – particularly where mutual trust was a foundational element.

The Companies Winding Up Rules (2023 Consolidation) (“CWR”)

While section 92(e) of the Act sets out the substantive legal basis for winding up a company on “just and equitable” grounds, the CWR govern the procedural mechanics of how that remedy is accessed and adjudicated. In other words, the Act gives the right; the CWR governs how that right is exercised in practice. Without adherence to these Rules, even the most compelling substantive claim may falter and therefore the CWR act as the procedural “gateway” to relief.

The CWR are crafted to ensure that all parties – petitioners, respondents, the company, and other stakeholders – are afforded fair notice, a meaningful opportunity to be heard, and clearly defined timetables. Practitioners must treat the CWR not as a checklist, but as an integral strategic tool – one that shapes not only how a case is fought, but whether it is fought at all.

A Distinctive Procedural Question in Shareholder Petitions

A key procedural feature that distinguishes shareholder winding up petitions is found under Order 12(1)(b)  CWR in the question of how the proceedings should be characterised: should it be treated as a proceeding against the company, or as an inter partes dispute between shareholders?

This issue frequently arises in petitions based on just and equitable grounds, where the substantive conflict lies not with the company as a corporate entity, but between competing shareholder factions – typically, one or more minority shareholders (as petitioners) and the majority (as respondents).

Where the Court makes a direction under Order 12(1)(b) that the proceeding is to be treated as an inter partes dispute, the effect is that the company is excluded from active participation in the litigation. As a result, for the purpose of any subsequent costs orders, the company is not treated as the losing party, and any costs awarded to the successful party will be borne not from company assets, but by the party against whom the costs order is made – subject to the Court’s overall discretion under Order 62 of the Grand Court Rules.

This approach is consistent with the decision in Freerider Limited [1], where the Grand Court held that, because the dispute was in substance between shareholders (Mr. Heinen and Mr. Le Comte), the company should not participate in the proceedings. The Court subsequently ordered  that the company be wound up on just and equitable grounds, and that Mr. Le Comte, as the unsuccessful respondent, pay Mr. Heinen’s costs of the petition and related applications.[2]

Powers of the Court in Winding Up Petitions

Aside from determining whether, on the facts and/or the law, a winding up petition should be granted or dismissed,[3] the Court has additional jurisdiction that is unique to petitions brought by shareholders on just and equitable grounds.

In such cases, the Court may exercise its equitable discretion to make alternative orders in lieu of a winding up order. These may include, among other remedies, an order regulating the future conduct of the company’s affairs, or an order requiring that one or more members purchase the shares of another member.[4]

These powers reflect the underlying principle that winding up is a remedy of last resort, and where appropriate, the Court may instead impose a solution that preserves the company while resolving the underlying shareholder dispute.

Conclusion

A winding up petition on just and equitable grounds offers a vital remedy for shareholders facing irreconcilable disputes within a company. While it is a powerful tool, the process is complex and requires careful consideration of the facts and the legal implications. The court will typically view winding up as a last resort, making it essential for shareholders to have expert legal guidance to assess the viability of such a petition.

Through section 92(e) of the Act and the procedural architecture of the CWR, the Financial Services Division of the Grand Court is equipped with broad powers to assess each case on its merits and craft an outcome that is fair, proportionate, and responsive to the parties’ underlying commercial relationship.

Importantly, the Court’s discretion is not confined to granting or dismissing a petition; it may, where appropriate, fashion alternative relief to protect the interests of shareholders without dissolving the company. The procedural distinction under Order 12(1)(b) CWR – between proceedings against the company and inter partes shareholder disputes – further demonstrates the nuanced approach the Court takes in balancing justice, efficiency, and fairness.

For shareholders navigating serious disputes, understanding the substantive principles and procedural intricacies of just and equitable winding up is critical. Timely legal advice and strategic engagement with the framework set out in the Act and the CWR can often mean the difference between an orderly resolution and prolonged, value-destructive litigation.

[1]               (2009 CILR 604)

[2]               (2010 (1) CILR 486)

[3]               The Powers of the court are contained in section 95 of the Act

[4]               Section 95(3) of the Act

On 14 November 2024, the Judicial Committee of the Privy Council handed down a landmark decision in Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd (Cayman Islands) [2024] UKPC 36. This ruling overruled the Grand Court of the Cayman Islands’ decision in Gao v China Biologic Products Holdings, Inc 2018 (2) CILR 591, in which the court had struck out an action filed by a minority shareholder. The action challenged the board of directors’ exercise of their power to allot and issue shares, with the plaintiff claiming a breach of fiduciary duty. However, the Grand Court had held that the fiduciary duty in question was owed to the company, not to individual shareholders, meaning the shareholder lacked standing to pursue the claim.

The Privy Council’s decision set a precedent in the Cayman Islands, allowing shareholders whose holdings are diluted by an improper allotment of shares to bring a personal claim against the company. This development represents a significant shift in the legal landscape for minority shareholders and clarifies their rights in such circumstances. HSM Associate, Alex Davies, explores this case.

Background to the Appeal

The Respondent was a cement production company based in China but registered in the Cayman Islands. The Appellant was one of four major shareholders in the company, alongside Asia Cement Corporation (ACC), China National Building Materials (CNBM), and China Investment Company Limited.

There had been an ongoing dispute over control of the Respondent. The Appellant claims that bonds and shares were issued to parties connected to ACC and CNBM, with the improper aim of diluting the Appellant’s shareholding and gaining control of the company.

When the Appellant sought a court declaration that the issuance of shares was improper, the Respondent attempted to have the case dismissed. The Grand Court of the Cayman Islands ruled in favour of the Appellant, but the Cayman Islands Court of Appeal overturned this decision, striking out the case. The Appellant then appealed to the Judicial Committee of the Privy Council (the “Board”) to reinstate the case.

Judgment and Reasons

The Board allowed the appeal, ruling that a shareholder can bring a personal claim against a company if the company’s directors issue shares for an improper purpose that negatively impacts the shareholder. Therefore, the writ filed by the Appellant should not have been struck out and should be reinstated. Lord Hodge and Lord Briggs delivered the judgment.

A company’s relationship with its shareholders is governed by the company’s articles of association. However, these terms can be changed by a special resolution passed by a 75% majority of shareholders. [paragraph 31]

The courts have long recognized that shareholders can enforce certain rights directly against the company, such as the right to vote at a general meeting, through a personal claim, rather than through a derivative action on behalf of the company. [40]

While not all shareholder rights are explicitly outlined in the company’s articles, directors are fiduciaries with special duties, including the duty to use their powers only for proper purposes. Directors may, however, act in a way that appears to be within their powers under the articles but is done for an improper purpose, making the action invalid. Shareholders adversely affected by such actions may then have grounds for a claim against the company. [41]

In this case, the Cayman Islands Court of Appeal mistakenly ruled that no such claim existed. The Board corrected this, ruling that a shareholder whose stake has been diluted by an improper issuance of shares can bring a personal claim against the company. However, in some cases (not applicable here), such claims may be blocked if a majority of shareholders ratify the improper allotment at a general meeting, excluding the newly issued shares. [66]

When a person becomes a shareholder, they acquire a bundle of rights, including the right for directors to issue shares. This power is a fiduciary one and must be exercised for a proper purpose. [67]

It is an implied term of the contract between the company and its shareholders that when directors issue new shares, they must do so in accordance with their fiduciary duties, in good faith, and for the benefit of the company as a whole. If the issuance is aimed at benefiting one group of shareholders at the expense of others, the issuance is invalid. [69-71]

Although directors owe their duties to the company and not directly to individual shareholders, an improper exercise of power (acting as the company’s agents) breaches the corporate contract between the company and its shareholders, providing a basis for the shareholder’s claim. [72-75]

Finally, while a majority of shareholders could theoretically ratify an invalid allotment of shares, such ratification must actually occur and cannot override protections against the oppression of minority shareholders. [80-81, 84]

Fiduciary Duty and the Power to Allot Shares

In its judgment, the Privy Council emphasised that the power to allot and issue shares is conferred upon directors by the company’s articles of association, and that this power must be exercised as a fiduciary duty. The decision underscores the directors’ obligation to act in the best interests of the company when making such decisions. The Privy Council explicitly stated that the power to allot shares must not be used for improper purposes, such as altering the balance of power between shareholders.

While it is common for an allotment of shares to affect the relative power of shareholders, the ruling clarified that this should only occur where the allotment is made in good faith and for a legitimate business purpose, such as raising capital.

Improper Purpose

The Privy Council’s judgment further considered the nebulous issue of improper purpose, including whether directors’ decisions are tainted by improper motives. This question has been the subject of some debate in previous cases, including the landmark Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas Plc. [2015] UKSC 71 in which the Supreme Court was divided on the issue. In that case, the Court considered whether a decision with both legitimate and illegitimate reasons should be set aside. The Supreme Court found on the facts of that case they should, and that in that case the proper purpose rule was pervasive, an obligation to consider the purpose in addition to acting in the best interests of the company. Lord Sumption and Lord Hodge stated that courts should focus on the improper purpose and whether the decision would have been made without it. If the decision would not have been made without the improper motive, it would be considered improper. Conversely, if the legitimate reasons for the decision were sufficient to warrant the action, even without the improper motive, the action may stand.

In Stobart Group Ltd v Tinkler [2019] EWHC 258 (Comm), the court suggested test should be whether the improper purpose was the “substantial or primary purpose” behind the decision.

Remedies

If an allotment of shares is successfully challenged on the grounds of improper purpose, shareholders have several potential remedies. The primary remedies are:

  1. Damages: Shareholders may be entitled to compensation if they can demonstrate that they suffered financial loss as a result of the improper allotment.
  2. Rescission (Unwinding): Shareholders may seek to have the decision rescinded, effectively undoing the allotment and returning the company to its previous shareholding structure. This remedy may redress inequality if a share allotment was made to alter shareholder control for improper purposes, but must be promptly sought or such remedy is unlikely to be endorsed by the court.

Conclusion

The Tianrui decision marks a significant shift in Cayman Islands law regarding the rights of minority shareholders and the fiduciary duties of directors. Shareholders who face dilution of their holdings due to an improper allotment of shares now have a clearer path to seek redress. However, the legal questions surrounding improper purpose and the appropriate remedies remain complex and nuanced, and future cases will likely continue to refine the application of these principles.


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