Cayman Islands: Rhone Holdings, LP: Cayman Court Of Appeal Upholds Validity Of Non-Petition Clause

In an important decision for the Cayman Islands funds and insolvency industries, the Court of Appeal has confirmed that provisions in investment agreements contracting out of the right to present winding up petitions are enforceable and not contrary to public policy.

In August 2015 the Cayman Islands Grand Court struck out as an abuse of the process of the Court a winding up petition presented in contravention of Section 95(2) of the Companies Law (2013 Revision) (Law).  Section 95(2) of the Law provides as follows:

"95 (2) 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."

This was the first time that Section 95(2) of the Law had been invoked as a ground for striking out a petition since it had been enacted alongside a raft of other reforms and modifications in 2009.

The non-petition clause

The limited partnership agreement (the petition was presented in respect of an exempted limited partnership called Rhone Holdings, L.P.) contained, so far as material at clause 5.12, an agreement in the following terms:

"Bankruptcy. The parties agree not to cause (a) an involuntary proceeding to be commenced or an involuntary petition to be filed seeking (1) winding up, liquidation, dissolution, reorganization, or other relief in respect of the Partnership under any bankruptcy, insolvency, receivership, or similar law of any jurisdiction now or hereafter in effect or (2) the appointment of a receiver, trustee, custodian, sequestrator, liquidator, administrator, conservator, or similar official for the Partnership or Rhone 11, or (b) the Partnership to (1) voluntarily commence any proceeding or file any petition seeking winding up, liquidation, dissolution, reorganization or other relief under any bankruptcy, insolvency, receivership or similar law of any jurisdiction now or hereafter in effect, (2) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding, application or petition described in clause (a) above, (3) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, liquidator, administrator, conservator or similar official for the Partnership or for a substantial part of any of its assets; (4) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (5) make a general assignment for the benefit of creditors or (6) take any action for the purpose of effecting any of the foregoing."

Shortly after judgment was entered in the case, the petitioners indicated an intention to appeal this decision to the Cayman Islands Court of Appeal (Court of Appeal). On 19 November the Court of Appeal heard the petitioners' application for leave to appeal and, in so doing, heard the arguments that would have been made on the appeal if leave to appeal had been granted.

The Leave to Appeal application

The petitioners' application (and, if granted leave, their appeal) relied on two grounds. First the petitioners said that because the petition was presented in respect of a Cayman Islands exempted limited partnership, not a Cayman Islands company, Section 95(2) – found as it is within the Law – did not apply and that the separate regime found within the Exempted Limited Partnership Law 2014 (ELPL) applied. The relevant section of the ELPL relied upon was Section 36(3)(g), which provides:

"On application by a partner, creditor or liquidator, the court may make orders and give directions for the winding up and dissolution of an exempted limited partnership as may be just and equitable."

The opening words of Section 36 of the ELPL however provide that, unless its provisions are contrary to the provisions of Section 36, Part V of the Law (which contains Section 95(2)) will apply for this purpose.

Secondly the petitioners argued that even if Section 95(2) did apply to an exempted limited partnership, the public policy of the Cayman Islands required that it could not apply to a case such as the present where serious allegations of wrong-doing had been made in the petition in support of the plea that it was just and equitable that the partnership be wound up.

Decision of the Court of Appeal

In order to grant leave to appeal the Court of Appeal has to be satisfied that the appeal has a realistic, as opposed to fanciful, prospect of success, or that it involves some question of general public importance. Having heard the petitioners' arguments the Court of Appeal dismissed the application for leave to appeal and upheld the Grand Court's decision.

Dealing with the first strand of the petitioners' submissions, the question of whether Section 36(3)(g) of the ELPL meant that Section 95(2) of the Law did not apply to winding up petitions presented in respect of exempted limited partnerships, Justice of Appeal Rix, in a judgment with which the other members of the Court of Appeal agreed, said:

"In my judgment the submission that Section 36(3)(g) overrides Section 95(2) of the Law and by its wording magically excludes the provisions of Section 95(2) which requires the court to dismiss or adjourn a petition on the ground that the petitioner is contractually bound not to present a petition is quite simply impossible and one which has no reasonable prospect of success at appeal."

Dealing with the petitioners' submission that Section 95(2) of the Law is, in certain circumstances (including the circumstances of this case) contrary to public policy, Justice of Appeal Rix continued:

"The submission that the terms of Section 95(2) of the [Law] should be ignored on grounds of public policy is impossible. The wording of Section 95(2), which applies to companies as well as exempted limited partnerships, makes plain that such a position is not contrary to public policy. On the contrary, it represents the policy of the law by enactment because the express terms of Section 95(2) give statutory strength to what would otherwise be a contractual agreement, by stating that the court shall dismiss or adjourn a petition on the ground that the petitioner is contractually bound not to present a petition against the company. So such an agreement cannot be contrary to public policy."

The above quotations are taken from our handwritten note of the Court of Appeal's extempore judgment and may therefore not conform precisely to the final handed-down judgment. A fuller analysis of the case will follow soon.

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