Vol 10 (2013) - Issue 4

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Introduction of Non-Petition Covenants

Introduction
Section 95(2) of the Companies Law (2012 Revision) ('Companies Law') which was introduced into the Companies Law on 19 July 2010 provides the statutory basis on which the Cayman Islands Courts shall dismiss or adjourn a winding up petition against a company on the ground that the petitioner is contractually bound not to present a winding up petition. Section 95(2) states that:
'The Court shall dismiss a winding up petition or adjourn the hearing of a winding up petition on the ground that the petitioner is contractually bound not to present a petition against the company.'
Since the introduction of Section 95(2) the practice has developed, particularly in the context of open-ended investment funds, where fund promoters seek to insert so-called non-winding up petition covenants, such as the following, in fund subscription agreements:
'The Investor hereby covenants that it shall not take any action to present a petition or commence any case, proceeding, proposal or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganisation, arrangement in the nature of insolvency proceedings, adjustment, winding-up, liquidation, dissolution, composition or analogous relief with respect to the Company or the debts of the Company.'
So far as we are aware there have been no reported cases to date where an investment fund has sought to invoke Section 95(2) to obtain the dismissal of a winding up petition against it. There are several possible reasons for this, including (i) the Section was introduced into Cayman Islands law relatively recently, (ii) non-winding up petition restrictions will most likely be challenged in the Courts in distressed situations and as the economic condition and outlook for investment funds continue to improve the likelihood of a Court challenge lessens.
This article seeks to analyse the effects of Section 95(2) and highlight any practical consequences which have arisen from the use of non-winding up petition covenants in the documentation for investment funds.

Circumstances in which a Company may be wound up by the Cayman Courts
The main grounds upon which an investor may present a petition to the Court to wind up an investment fund are that:
(i) it is just and equitable that the company should be wound up (the 'Just and Equitable Ground'); or
(ii) the company is unable to pay its debts (the 'Insolvency Ground').

The Cayman Islands Courts will only consider the merits of a winding up petition where the petitioner can show that it has legal standing to present the petition. Creditors (including contingent and prospective creditors) and contributories (e.g. shareholders of an investment fund) have legal standing to present a winding up petition.
The circumstances in which petitioners have typically filed a successful winding up petition on the Just and Equitable Ground include: (i) fraud (for example, where a company has been formed for a fraudulent purpose and has carried on its business for an improper purpose), (ii) loss of substratum (for example, where the company is no longer able to carry on the business for which it was formed), (iii) deadlock which affects the operation or function of the company and which the directors and/or shareholders are unable to resolve, (iv) fraud upon the minority and the majority are in control of the company. However the list of grounds upon which a petition can be filed to wind up a company under the Just and Equitable Ground are non-exhaustive and are subject to the discretion of the Court. Since the global financial crisis began in 2007, a large number of winding up petitions have been filed by investors in the Cayman Courts against investment funds under the Just and Equitable Ground on the basis of 'loss of substratum' particularly in the context of investment funds in 'soft wind-down' mode. As can be seen from Section 95(2) set out above, the Section is drafted widely and appears to permit an investor to contract out of its ability to present a winding up petition on both the Insolvency Ground and the Just and Equitable Ground.