Misrep Next steps
In a recently issued ruling (CICA (Civil) Appeal No: 16 of 2023 and CICA (Civil) Appeal No: 14 of 2024) the Cayman Islands Court of Appeal has clarified earlier judgments issued by the Grand Court in relation to two separate Cayman Islands liquidations, Direct Lending Income Feeder Fund, Ltd (In Official Liquidation) and HQP Corporation Limited (In Official Liquidation).
As a reminder, those earlier judgments considered whether shareholders could make claims into the liquidation estate of a Cayman Islands company for misrepresentation relating to the purchase of their shares in that company, and if they could, where those claims should rank in the context of a liquidation distribution. Up until the delivery of these judgments an 1880 House of Lords judgment, Houldsworth v City of Glasgow Bank, had prevented such claims being admissible to proof in a Cayman Islands liquidation.
In the case of HQP Corporation, Justice Doyle held that the rule in Houldsworth did not apply, meaning that shareholders could bring claims for misrepresentation, and that such claims would rank alongside ordinary unsecured creditor claims, and ahead of redemption creditors’ claims.
In the case of Direct Lending, Justice Segal came to a different view and found that a qualified formulation of the rule in Houldsworth did apply, meaning that shareholders could not bring claims for misrepresentation that ranked alongside unsecured creditor claims. Justice Segal instead found that claims for misrepresentation are claims made by shareholders in their capacity as shareholders, such that they should be subordinate to non-shareholder claims and rank alongside other shareholder claims, such as those made by redemption creditors.
These decisions were both appealed and, given the common issues at play, the appeals were joined and heard together by the Cayman Islands Court of Appeal at the end of November 2024.
In its ruling, the Court of Appeal has confirmed that shareholders may bring claims for misrepresentation against a Cayman Islands entity in liquidation, and has made separate determinations on the question of ranking, taking into account the specific circumstances of the HQP and Direct Lending liquidations.
In relation to Direct Lending, the Court of Appeal has ruled that misrepresentation claims rank behind ordinary unsecured creditors, and pari passu with redemption creditors.
In relation to HQP, the Court of Appeal has similarly ruled that misrepresentation claims rank behind ordinary unsecured creditors and rank pari passu with shareholders holding the same class of shares. The Court of Appeal considered HQP’s Articles of Association (which created a “last in, first out” waterfall in the event of a liquidation) and determined that HQP’s misrepresentation plaintiffs’ claims remain bound by the contractual waterfall agreed to prior to liquidation.
What this means in relation to HQP, is that the claims of the latest series of shareholders rank in priority to the claims of the earlier series of shareholders in accordance with the pre-liquidation contractual waterfall.
Conclusion
There is an obvious logic in allowing shareholders to bring claims for misrepresentation in circumstances where misleading and false information has been provided to them and which is alleged to have materially influenced their decision to invest, in the form of compensation in damages.
What is noteworthy in the case of HQP, however, is the fact that that these claims remain bound to the contractual waterfall agreed to in the same circumstances.
The position is arguably more straightforward in the case of Direct Lending, where such misrepresentation claims would rank after ordinary unsecured creditors and pari passu with redemption creditors.
It remains to be seen whether this judgment leads to an appeal to the Privy Council in London, the Cayman Islands’ final court of appeal.
Chris Smith and Martin Trott act as Joint Official Liquidators of HQP Corporation Limited (In Official Liquidation).
