Every ending is a new beginning

A recent Grand Court decision highlights that the winding up petition process is not intended to be used as a de facto injunction or when alternative remedies are available.

Before we look out towards the year ahead and imagine what new beginnings may be in store for 2019, it is worth first looking back at end of 2018 and two recent decisions in the Cayman Islands Grand Court and Court of Appeal. These decisions remind us that for every new beginning, there is an opportunity for a quick end. While at first this may seem disheartening, in the realm of commercial litigation, a quick ending is almost always the best result one can hope for.

This quarter’s article reviews the recent case law in relation to anti-suit injunctions and strike out applications in the Cayman Islands. The anti-suit injunction is a powerful tool giving parties an opportunity to bring litigation to an end before it even begins. The strike out application is similarly valuable as it can end litigation at a preliminary stage enabling parties to avoid lengthy litigation, saving time and costs.

Anti-suit injunctions

An anti-suit injunction is a well-known order which directs a party not to commence or continue proceedings in a particular jurisdiction. Often, applications are made to prevent foreign proceedings on the basis of exclusive jurisdiction clauses (e.g. agreements between parties to refer all disputes to arbitration, or to the courts of the Cayman Islands). Courts are generally hesitant to make orders which would impair or infringe on the jurisdiction of foreign courts. However anti-suit injunction orders are not seen as violating a foreign court’s jurisdiction. The orders are granted “in personam”, that is, against the relevant parties themselves who are subject to the Cayman Island court’s jurisdiction.

By judgment delivered on Oct. 8, 2018, in Argyle Funds SPC Inc. (in Official Liquidation) v BDO Cayman Ltd the Cayman Islands Court of Appeal allowed an appeal limiting the scope of the anti-suit injunction previously ordered by the Grand Court.

In the Feb. 13, 2018, unreported judgment of the Grand Court in In the Matter of an Application of BDO Cayman Ltd concerning Argyle Funds SPC Inc. Justice Parker granted an anti-suit injunction against Argyle Funds SPC Inc (in Official Liquidation) preventing the joint official liquidators of Argyle from continuing proceedings Argyle had commenced in the Supreme Court of the State of New York against BDO Cayman Ltd and three other parties: BDO Trinity Limited, BDO USA LLP and Schwartz & Co Ltd (collectively referred to as the “affiliates”).

Argyle, acting by the liquidators, had commenced the New York proceedings in June 2017, claiming damages of at least US$86 million alleging that BDO Cayman and the affiliates had engaged in gross negligence and/or intentional and fraudulent misconduct by failing to alert Argyle and its investors to very significant acts of fraud that had taken place and ultimately caused catastrophic loss to Argyle (and which led to the appointment of the liquidators).

BDO Cayman’s anti-suit application was founded upon engagement letters entered into between BDO Cayman and Argyle under which the parties agreed that any dispute or claim arising out of, or in relation to, the engagement letters would be subject to the exclusive jurisdiction of an arbitration seated in the Cayman Islands. By commencing the New York proceedings, BDO Cayman alleged that Argyle breached the exclusive jurisdiction provisions of the engagement letters. Further, BDO Cayman claimed that under the engagement letters, Argyle agreed that BDO Cayman would be solely responsible for its acts and those of its assignees, which BDO Cayman said included the affiliates. BDO Cayman argued that under those provisions, any claims not resolved by an arbitral tribunal should be resolved by the court in accordance with Cayman law.

Justice Raj Parker found that the court’s jurisdiction to grant anti-suit injunctions to restrain foreign proceedings brought in violation of an agreement to arbitrate is “long-standing and well-recognised,” but also discretionary and will not be exercised as a matter of course. If the court finds that there is a binding arbitration or jurisdiction clause identifying a forum, then the court will ordinarily grant the injunction to enforce the contractual right that a party has bound itself to, unless there are good reasons why that should not be done. In the present case, Justice Parker found that there was a binding arbitration clause to be enforced.

The injunction not only prevented Argyle from pursuing BDO Cayman in the New York Proceedings, it also prevented Argyle from proceeding against the Affiliates, as the Grand Court found that the Affiliates were protected under the engagement letters.

Argyle appealed the part of the order of Justice Parker whereby Argyle, acting by its liquidators, was restrained from continuing the New York proceedings against the affiliates. Argyle did not appeal the order made in respect of BDO Cayman.

Justice of Appeals Richard Field delivered judgment on behalf of the Court of Appeals (CICA) on Oct, 8, 2018. In allowing Argyle’s appeal, the CICA found that the Grand Court judge erred in concluding that, in relation to the affiliates, the New York proceedings breached the terms of the engagement letters.

While the CICA considered a number of issues in the judgment, the key issue was the contractual interpretation of the relevant exclusive jurisdiction clause. In interpreting this clause the CICA relied upon the observations of Laurence Rabinowitz QC in Team Y & R Holdings Hong Kong Limited v Ghossoub [2017] EWHC 2401 (Comm) regarding whether exclusive jurisdiction clauses could be enforced in relation to proceedings brought against non-contracting parties. Those observations included the following: “Where contracting parties intend that any claim relating to the contract be subject to the exclusive jurisdiction clause even where it is one brought by or against a non-contracting party, clear words should be used expressly setting out this intention, the parties to be affected and, if relevant, the manner in which submission of any non-contracting parties to the jurisdiction of the chosen court is to be ensured.”

The CICA found that the relevant exclusive jurisdiction clause did not extend to the claims brought in the New York proceedings against the affiliates. If it had been the parties’ intention that the exclusive jurisdiction clause should apply to such claims, this should have been expressly provided for, but there was no such provision in this case. Accordingly, the appeal was allowed and Argyle was permitted to continue the New York proceedings against the affiliates.

This decision provides useful guidance as to how the Cayman Islands courts will approach the interpretation of exclusive jurisdiction clauses in relation to non-parties to the contract. The judgment serves as fair warning to all that, if the parties to a contract intend for non-parties to be bound by exclusive jurisdiction clauses, those clauses must be drafted carefully and clearly.

Strike out

An application to strike out another party’s pleadings is a common procedural method to shortcut the litigation process. It is typically made on the basis that the pleadings are an abuse of process, or that the pleadings disclose no reasonable cause of action (or defense). Additional issues arise in specific circumstances, such as in winding up petitions as considered below.

The Grand Court’s Oct. 24, 2018, judgment in In the matter of China Shanshui Cement Group Limited considers an application to strike out a winding-up petition to wind up China Shanshui Cement Group Limited on a just and equitable basis. The petition was filed by Tianrui (International) Holding Company Limited, a shareholder and creditor of the company.

By summons dated Sept. 11, 2018, the company sought an order that the petition be struck out on the basis that the petition is an abuse of process of the court. Interestingly, although the application was not ultimately pursued, Tianrui also filed its own strike out summons seeking to strike out the company’s strike out summons.

The filing of the petition marks the latest chapter in a long history of shareholder disputes and take-over battles amongst some of the major shareholders of the company. On Nov. 10, 2015, the company, through its directors, had previously applied to the Grand Court to wind up the company on the basis of cash-flow insolvency. The Nov. 25, 2015, judgment on the directors’ petition was widely discussed in the Cayman Islands. In that judgment, Justice Ingrid Mangatal found that directors of a company do not have statutory authority to petition the court to wind up a company without the sanction of a resolution of shareholders, unless the articles of association of the company expressly provide otherwise. Justice Mangatal found that the directors had no authority or standing to present the directors’ petition and so the directors’ petition was struck out.

Turning to the recent petition, Tianrui alleged that the affairs of the company had been conducted with a lack of probity and that Tianrui had justifiably lost confidence in the management of the company. In opposition, the company advanced three main arguments in support of its strike out application.

First, the Company alleged that Tianrui has misled the Court in the proceedings as Tianrui did not give an accurate account of the background which led to Tianrui petitioning the Court.

Second, the company submitted that Tianrui failed to pursue alternative remedies. It is well settled law that, on an application to strike out a contributory’s petition, the court must consider whether an alternative remedy is available to the petitioner and whether the petitioner is acting unreasonably in not pursuing that remedy. The petitioner must demonstrate that the petition has been pursed in the interest of the shareholders as a class and not merely for its own individual interests, whatever they may be.

Third, the company claimed that the proceedings were commenced for an impermissible collateral purpose to obtain a de facto injunction in relation to a bond transaction which Tianrui opposed.

Although the court did not appear moved by the company’s argument in relation to Tianrui misleading the court, Justice Mangatal agreed with the company’s second and third main arguments. Justice Mangatal considered that there were alternative remedies available to Tianrui, including, for example, seeking an injunction in relation to stopping the bond transaction that Tianrui opposed.

The judge found that it was unreasonable for Tianrui not to have pursued an alternative remedy and as a result the petition must be struck out. Justice Mangatal also found that the petition was brought for the improper collateral purpose of obtaining a de facto injunction in relation to the bond transaction without having to satisfy the guidelines for the granting of injunction relief (e.g. providing a cross-undertaking as to damages). As such, the petition should also be struck out on this basis.

In addition to serving as a reminder of the utility of strike out applications, this decision also highlights that the winding up petition process is not intended to be used as a de facto injunction or used when alternative remedies are available to contributories. Petitions commenced in these circumstances may very well come to an early end.

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