China Shanshui: Limit to the Ability of a Company’s Directors to Apply for Its Own Winding Up

James Noble, Marc Kish and Chai Ridgers of Harneys’ Litigation and Insolvency practice*

In the recent decision of Re China Shanshui Cement Group Limited (unreported, 23 November 2015) the Grand Court of the Cayman Islands considered the meaning of s. 94(1)(a) of the Companies Law (2013 Revision) (the “Law”), which deals with the authority of the directors of a Cayman Islands company to present a petition for the winding up of the company. MangatalJ departed from an earlier decision of the same Court by finding that directors have no such authority – even where the company is insolvent – unless either: (a) they have obtained approval of the shareholders by ordinary resolution; or (b) the company, if incorporated after 1March 2009, has articles of association that contain an express provision authorising the directors to present a petition.

The Facts

The directors of a Hong Kong-listed company caused it to file a winding up petition without first seeking the approval of the company’s shareholders, which they knew could not be obtained in light of opposition from the company’s two largest members. On that basis, those members challenged the company’s standing to bring the petition.

The Decision

The issue of whether a company’s directors have automatic authority to petition to wind up the company has been a vexed issue for many years in England, where for some time the case of Re Emmadart Ltd [1979] 1 Ch. 540 had required shareholder authority for such actions until an amendment to the law eventually changed the position. When a new-look Companies Law was introduced in the Cayman Islands in 2008, s. 94(2) of the Law provided some welcome clarification by providing that:

“where expressly provided for in the articles of association … the directors of a company incorporated after the commencement of this Law have the authority to present a winding up petition on its behalf without the sanction of a resolution passed at a general meeting”

However, for Cayman Islands companies incorporated prior to 1 March 2009 (when the Law came into force), the drafting did nothing to improve the situation until it was decided by Jones J in Re China Milk Products Group Ltd [2011] (2) CILR that the same principle extended to insolvent companies – or companies of doubtful solvency – incorporated before that date. Jones J said in that case that the temporal limitation contained in s.94(2) of the Law only applied to solvent companies.

In considering the scope of s. 94 of the Law, Mangatal J was also taken by the Banco Economico SA v Allied Leasing and Finance Corporation [1998] CILR 102 decision, in which Smellie J (as he then was) extended the Emmadart principles to the Cayman Islands.

She concluded that, whilst Jones J’s construction of s. 94 may have been a commercial one, she felt unable to endorse it in circumstances where the drafting was not so ambiguous as to warrant such a liberal reading. It must be said that her reasoning was sound, but the question now arises what can or should the Legislature do to plug the gap that her judgment has left? The recognised approach to conflicting first-instance decisions is to follow the more recent of the two, and we would expect to see Mangatal J’s decision followed with the result that the Law in this area is likely to become the subject of increased scrutiny throughout the industry.

Take Aways

Although the decision will not affect companies incorporated after March 2009 (provided, at least, that they choose to give the directors the requisite authority in their articles of association), the Boards of older companies could now find themselves in an unwanted battle with shareholders to make decisions which they consider it their duty to make, such as appointing provisional liquidators to put forward a restructuring plan. It is to be hoped that the Legislature can take this opportunity to introduce clearer and more effective provisions into the Law to provide assistance to directors in having regard to the interests of creditors and acting, where appropriate, without the blessing of their shareholders. It has always been one of the Cayman financial services industry’s greatest strengths that it can react where necessary to issues of public policy and legal certainty and in so doing provide comfort to office holders and stakeholders alike.


* Advised China Shanshui Investment Company Limited, one of the successful opposing shareholders.