Law Talk

The second quarter of 2015 has seen the passage of long awaited enabling legislation for the Cape Town Convention to apply in the Cayman Islands and an interesting decision from the Grand Court considering the use of the “oppression remedy” provided in section 95 of the Cayman Islands’ Companies Law.

IN THE COURTS 

Acorn International, Inc. FSD 109 of 2014 

An “oppression remedy,” which allows shareholders to apply to court to obtain relief in circumstances where their interests are being unfairly disregarded, is a feature of many common law jurisdictions.

Such relief will often involve orders to regulate the affairs of the company going forward or to remedy the conduct that is at issue. Pursuant to subsection 95(3) of the Companies Law (Revised), the “oppression remedy” in this jurisdiction can only be obtained as alternative relief in a petition to wind up a Cayman Islands company on the just and equitable ground. The powers set out in subsection 95(3) are in the nature of injunctive relief and a general power to regulate the conduct of the company’s affairs in the future.

An unusual feature of the Cayman Islands “oppression” provisions is that a party seeking relief from the court must first meet the test for winding up the company (that is, ending it as a going concern) in order to have recourse to the alternative relief (Camulos v. Kathrein [2010] 1 CILR 303). This creates a strange anomaly. In order to justify relief less invasive than ending the company as a going concern, a party must first show that the facts do justify ending the life of the company.

A recent decision of the Justice Andrew Jones, Q.C. of March 6, 2015, in the matter of Acorn International, Inc1 considered and applied s.95(3).

Acorn was a Cayman Islands’ company listed on the New York Stock Exchange that served as a holding company for a group of businesses conducting TV direct sales business in the People’s Republic of China. A petition was brought by a company representing the majority shareholders and a cross-petition was brought by companies representing the minority shareholders.

A peculiar aspect of the Cayman oppression remedy was brought to light immediately in the decision as: “[b]oth petition and cross-petition necessarily plead that it would be just and equitable for the Court to make a winding up order, but both petitions ask the court to exercise its jurisdiction under section 95(3) of the Companies Law to make orders for alternative relief.”

The “oppression remedy” is intended to inter alia provide a judicial mechanism to resolve shareholder battles without liquidating a company’s assets and ending it as a going concern.  Where a company has going concern value, the last thing that a disgruntled shareholder might want is to realize his shares by the destruction of that going concern value – cutting the corporate baby in half.

Yet case law interpreting s. 95(3) suggests that a petitioner must seek the very thing he might not want (to wind up the company) in order to seek the thing that he actually wants (an alternative to winding up the company). This forces the petitioner to argue against (some of) the very relief that he seeks in the petition.
In Acorn, the court concluded that the minority shareholders effectively used their control of the board of directors to,

  1. remove a representative of the majority shareholders from office; and
  2. refuse to hold an extraordinary general meeting in the face of a threat by the majority shareholders to use such a meeting to change the board of directors and take it away from the effective control of the minority shareholders.

The court concluded that: “[w]hether or not a winding up order is an appropriate remedy must depend on the basis upon which the court comes to the conclusion that the jurisdiction is engaged.

In this case the jurisdiction is engaged because the petitioner has justifiably lost all confidence and trust in the company’s directors who have acted in bad faith and exercised their powers for the improper purpose of disenfranchising the majority shareholders so as to perpetuate the minority shareholders’ control of the board. It is not necessary to make a winding up order to remedy this wrong. This complaint is capable of being remedied by an order that a meeting of the shareholders be convened for the purpose of considering and, if thought fit, passing the resolutions which Mr Roche has been attempting to put forward on behalf of the majority shareholders and I do not consider that the pursuit of this particular remedy is unreasonable in any way.

“I have also concluded that it would be unjust in the circumstances of this case to exercise the court’s discretion by imposing upon the petitioner (and the majority shareholders) a remedy which they are not seeking.” (paras. 71 and 72)

The majority shareholders might not have been seeking to wind up the company (in oral argument) but as this decision states, they were necessarily seeking to do that in their petition, because that is what was required.

An interesting question arises – but for s. 95(3), would the court have wound up the company following established principles and case law? Arguably, the answer in Acorn should have been no.  It is well established that a winding up might be justified on the basis of a justifiable loss of trust and confidence in a company’s directors and that loss is justifiable where there is a proven lack of probity in the conduct of the company’s affairs.  However, it is also established that a winding up petition should be dismissed if the petitioner has an adequate alternative remedy (Camulos v. Kathrein [2010] 1 CILR 303).

The court in Acorn concluded that the directors acted in breach of their fiduciary duties.  This would normally ground a cause of action by the company, or a derivative action by its shareholders, against its directors and (on the facts in Acorn) likely justify an injunction to prevent the ongoing breaches.

In addition, to the extent that the actions of the directors amounted to a breach of Acorn’s articles the majority shareholders might well have been in a position to enjoin the breach. As succinctly stated by Justice Henderson in Russell Alternative Investments Funds Plc et al v Laurus Offshore Fund, Ltd. et al2: “First, the articles of association constitute a contract to which all of the members of the company and the company itself must adhere. Second, the court may restrain a company and its directors from acting in a way which violates the articles.”

Since these alternatives appear to have been available, the petition might well have failed on the basis that other adequate remedies were available.

Ultimately, the relief granted in Acorn appears unassailably just by putting the control of the company back into the hands of the majority shareholders and (consistent with oppression remedy case law) the court went only so far as was necessary to remedy the oppression.

It might well be that the law of the Cayman Islands in respect of the “oppression remedy” continues to evolve. As it stands now, it is said to be the case that the jurisdiction of the court to make orders pursuant to s.95(3) is only engaged if it can be shown that the court could otherwise make a winding up order.

The difficulty with that state of affairs is that the body of law established to determine when a winding up order can be justified – as taken from English and other common law jurisdictions – has evolved in jurisdictions where stand-alone oppression remedies are available. Naturally, the barrier to entry is high since the result is ending the company as a going concern, and disproportionately high if the same test is being used to determine when a court can grant relief that is far short of ending a company as a going concern.

It might not be intellectually sustainable to use a test meant to determine that winding up only (and no alternative relief) is justified – and to use it to determine if alternative relief is justified.  The temptation to incrementally relax the jurisdictional trigger might prove irresistible.

LEGISLATIVE CHANGES 

Extension of Cape Town Convention to Cayman 

The Cayman Islands is poised to have The Convention on International Interests in Mobile Equipment and the associated Protocol to the Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment (the “Aircraft Protocol” and together known as the “Convention” or the “Cape Town Convention”) come into force in the jurisdiction as early as August, 2015 – an event long sought after by Cayman Islands aviation finance attorneys.

The Cape Town Convention was concluded at Cape Town, South Africa on Nov. 16, 2001, and the United Kingdom was among the original parties who signed the Convention. Although the Aircraft Protocol came into force in 2006, and had been ratified by many of its original signatories, it was not until 2014 that the U.K. government opted to ratify the Convention. Consequently, the Cayman Islands (as a British overseas territory) is now also preparing to implement the Convention in this jurisdiction.

Cayman legislation 

While awaiting ratification of the Convention by the U.K., in 2009 the Cayman Islands enacted The Cape Town Convention Law, 2009 allowing Cayman Islands entities to “opt-in” to domestic legislation which attempted to mirror the provisions of the Convention.

Post ratification of the Convention by the U.K., The International Interests in Mobile Equipment (Cape Town Convention) Law, 2015 (the “Implementation Law”) which will implement the Convention in the Cayman Islands, will be brought into force and will repeal and replace The Cape Town Convention Law, 2009.
What is the Convention? What are the advantages?

The Convention established a standardised international legal framework for the creation and registration of international interests3 in helicopters, airframes and aircraft engines which constitute “aircraft objects.” Registration on the international registry established under the Convention is not essential to the creation or perfection of an international interest.

However, it allows creditors who register their interests on the International Registry to guarantee the priority of their claim against other parties, provides them with an internationally recognised set of rights in the event of a debtor’s default or insolvency and includes a framework to deal with any disputes that arise under the Convention.4

Priority is based upon the order of registration. Failure to register an international interest renders the unregistered interest subordinate to competing registered interests even if the unregistered interest was known to the holder of any registered interests at the time of creation or registration.

A key advantage of the international registry is that creditors are able to register their interests against aircraft engines separately from the airframes – something which cannot currently be done on the Cayman Islands’ Civil Aviation Authority Mortgage Register, where mortgages must be registered against the aircraft as a whole, including its engines.

The Convention will apply to transactions involving aircraft objects where the following requirements are satisfied:

(1) the aircraft object meets specified size/power requirements;

(2) the transaction creates an ‘international interest’ or prospective international interest; and

(3) at least one of two connecting factors is present: (a) at the time of execution of the agreement, the lessee, the chargor or the conditional buyer or seller (under a contract of sale) is situated (including being incorporated or having its centre of administration or principal place of business located) in a Convention state (including a territorial unit of a Convention state); or (b) if at the time of execution of the agreement the airframe or helicopter is registered on the national registry of a Convention state (including a territorial unit of a Convention state). Following the ratification of the Convention by the U.K. and its extension to the Cayman Islands, the Cayman Islands will be recognized as a territorial unit of a Convention state for this purpose.

Cayman Islands declarations 


The Convention employs a system of declarations which allows Convention states to deposit “opt-in” and “opt-out” declarations stipulated by the Convention. At the request of the Cayman Islands’ government, the U.K. government will shortly make a number of declarations on behalf of the Cayman Islands in connection with its implementation of the Convention, the content of which is reflected in Schedule 3 of the Implementation Law.

These include:
a)    that all categories of non-consensual rights or interests which under Cayman Islands law had priority to registered international interests, for example, a lien of the Civil Aviation Authority and the Airports Authority in respect of unpaid taxes, will continue to have priority over international interests, including those registered prior to the date of ratification of the Convention;

b)    all remedies available to a creditor under any provisions of the Convention which are not expressed to require application to the court may be exercised without leave of the court or other court action;

c)    “speedy interim relief” for a creditor who adduces evidence of default by a debtor is defined as within 10 working days in the Cayman Islands from the date the application for relief is filed; and

d)    the Cayman Islands will apply Article XI, Alternative A (where the creditor secures recovery of the aircraft object rather than having to make request to the debtor, and if the debtor does not act, the court in its discretion, for the right to take possession of the aircraft under applicable law) in its entirety to all types of all insolvency proceedings and all other insolvency related events, and that the waiting period for the purposes of Article XI(3) of that alternative shall be 60 calendar days.

Since aircraft objects are highly mobile and subject to depreciation it was important for the Cayman Islands’ declarations to provide for them to be repossessed quickly upon insolvency, thereby reducing risk exposure and costs for creditors.

Significance to the Cayman Islands 

The Cayman Islands has long been a jurisdiction of choice for cross-border financing and investment structures primarily because of the advantages it offers including (a) political and economic stability; (b) a legal system which is based on English common law and an ultimate right of appeal to the Privy Council; (c) a tax neutral platform; (d) a well-established and experienced financial and legal services sector; and (e) Cayman Islands vehicles may be established and maintained cost-effectively with speed and simplicity.

The Cayman Islands is a leading jurisdiction for aviation finance transactions. Cayman Islands entities are often used in cross-border aircraft financing structures to enhance the security of the lender ─ their bankruptcy remoteness features make them attractive, for example, using a bankruptcy remote orphan trust structure. Where there is a financing structure which involves a Cayman Islands entity owning an aircraft, which is in turn leased to an operator in another jurisdiction, this will provide sufficient nexus for the Convention to apply.

In any event, even if the Cayman entity is not involved as a lessee, chargor or conditional buyer or seller, but perhaps as the parent of the lessee, it will provide additional comfort to financiers that other entities in the structure are located in jurisdictions which recognise and will give effect to the Convention and the remedies thereunder in the event of default under the finance documents. One overall objective is to provide lenders with more certainty around Cayman Islands insolvency laws in relation to aircraft objects.

The OECD has also developed a set of specific guidelines for governmental export credit agencies (ECAs) involved in aircraft export, which includes measures allowing ECAs to reduce costs to airlines in states that have ratified the Convention, known as the “Cape Town discount,” provided they make a number of qualifying declarations.

The Cape Town discount will apply to the Cayman Islands so that Cayman Islands aircraft owning entities may benefit. Similarly, The Export-Import Bank of the United States offers improved financing terms to buyers in countries which have ratified the Convention which will now include the Cayman Islands.

Impact upon Cayman Aircraft Mortgage Register 


In tandem with the enactment of the Implementation Law, the legislature has also amended the Cayman Islands Civil Aviation Authority Law to make provision for the registration of aircraft mortgages on the local register which, until now, has been governed by the Mortgaging of Aircraft Regulations, 1979 issued by the governor. The 1979 regulations will be revoked upon the issuance of regulations by the Cayman Islands government in respect of the mortgaging of aircraft, pursuant to the amendments to the Civil Aviation Authority Law, which are expected to occur shortly.

These regulations will recognise and take into account the registration of international interests on the international registry pursuant to the Implementation Law but preserve the priority of existing aircraft mortgages on the local register.

It is therefore not anticipated that the implementation of the Convention will lead to an exodus of aircraft mortgages currently registered on the local register to the international registry. However, on and immediately following the Implementation Law coming into force, the mortgages on the local register in respect of which an international interest exists will have their priority versus “security interests” under the Convention determined in accordance with the priority rules set out in the Convention.

Conclusion 


The Cayman Islands has taken a creditor-friendly approach to its implementation of the Convention, and has enhanced its position at the forefront of offshore financial centers involved in financing structures for commercial aircraft. It is anticipated that this move will be welcomed by lenders, ECAs, airlines and other parties that participate in the aircraft finance industry, as it augments the remedies and reduces the risk for lenders, thereby potentially decreasing the costs of raising finance.

ENDNOTES

  1. Acorn International, Inc. FSD 109 of 2014. Coram: Jones J
  2. Ruling – Russell Alternative Investments Funds Plc et al v Laurus Offshore Fund, Ltd. et al Cause No.430 of 2008 18.09.08.
  3. An “international interest” means any interest in an aircraft object that is held by a creditor that is either: (a) granted by the chargor under a security agreement; or (b) vested in a person who is the conditional seller under a title reservation agreement; or (c) vested in a person who is the lessor under a leasing agreement.  Whether an interest falls within one of these three broad categories is determined by applying the Convention’s own definitions and autonomous rules of interpretation, and not by reference to the domestic law of any Convention state or territory.
  4. It is also possible to register a “prospective international interest” in an aircraft object upon the occurrence of a stated future event, for example, the creditor’s acquisition of an interest in the aircraft object or registration of the airframe, to establish priority of interest prior to the closing of a transaction with that interest automatically becoming a perfected international interest on the closing of the transaction.

 

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Tania Dons

Tania advises on all areas of corporate and commercial law but with a particular focus on establishing and advising hedge funds and private equity funds and related regulatory matters. Tania has over 12 years of legal experience and represents major institutions, investment banks, fund managers, directors and trustees in all aspects of investment funds, including structuring and ongoing operations. Tania regularly advises on fiduciary duties, side letters, managed accounts, managing illiquid assets and other key issues facing investment funds.

Tania Dons
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