The Four Hurdles of Provisional Liquidation

In an ex parte on short notice application, the Cayman Islands Grand Court considered the four hurdles that must be overcome for the appointment of joint provisional liquidators (JPLs).

The application was brought by an individual investor in Seahawk China Dynamic Fund (the Applicant and the Company). The Applicant submitted that he became aware of dishonest conduct on the part of Hao Liang (Mr Liang) who held all of the management shares in the Company.

The Applicant presented a winding up petition in the Cayman Islands on just and equitable grounds and applied for the appointment of JPLs on an urgent ex parte short notice basis.

Doyle J noted that the court must be particularly careful when allegations of dishonesty are made at a hearing on an ex parte or ex parte short notice basis. The court was however satisfied that in the exceptional circumstances of this case it was appropriate to proceed on an ex parte short notice basis. Further notice to Mr Liang would increase the immediate risk of dissipation of assets and the risk of concealment or destruction of documents.

Doyle J went on to consider the four hurdles necessary for the appointment of JPLs under section 104 of the Companies Act (the Act). Doyle J was satisfied that the Applicant had jumped the four hurdles:

i.  The presentation of the winding up petition hurdle: a winding up petition had been presented on the basis that it was just and equitable for the Company to be wound up.

ii.  The standing hurdle: the Applicant was a contributory and had standing to make the application.

iii.  The prima facie hurdle: the Applicant had established an objectively justifiable loss of confidence in Mr Liang. The Applicant alleged that Mr Liang abused and misused his power in a manner that favoured his own interests to the detriment of the interests of the Company and the investors. The Applicant set out a series of dishonest conduct and deliberately concealed acts on the part of Mr Liang, including asset stripping from the Company and siphoning money to entities controlled by Mr Liang and his wife.

iv.  The necessity hurdle: The court only has jurisdiction to appoint JPLs if it is necessary to prevent one or more of the risks set out in section 104(2)(b) of the Act (ie the dissipation or misuse of the company’s assets; oppression of minority shareholders; or mismanagement or misconduct on the part of the company’s directors). In this instance, the appointment of JPLs was necessary to prevent the dissipation and or misuse of the Company’s assets and to prevent mismanagement and or misconduct on the part of Mr Liang. Although a prohibitory injunction had been obtained against Mr Liang in Hong Kong proceedings, the injunction did not prevent Mr Liang from managing the Company. The limited scope of the injunction did not deal with the clear risks and concerns. There was no less intrusive remedy that would be adequate in the circumstances, other than the appointment of JPLs.

Doyle J held that the balance of convenience clearly weighed strongly in favour of the appointment of JPLs notwithstanding the fact that the Company was solvent. An urgent independent investigation was also plainly required. Doyle J granted the order for the appointment of JPLs.

The decision serves as a reminder of the four hurdles that need to be satisfied for the appointment of JPLs.