The Grand Court of Cayman Islands holds that shareholders can bring claims for misrepresentation against a company in liquidation, in a significant departure from the House of Lords decision in Houldsworth.
Issues
The court’s direction was sought on the following three issues:
- Whether the redeeming preferred shareholders remain members or become creditors in respect of their unpaid redemption proceeds?
- Whether preferred shareholders may in principle assert claims against the company for damages for misrepresentation in relation to their subscription for shares in the company, and
- How the misrepresentation claims rank in the liquidation of the company.
On the first issue, the parties agreed before the hearing that the preferred shareholders remain unredeemed shareholders of the company, and Doyle J directed accordingly.
The case, therefore, turned on the second and third issues. Central to those issues was the question of whether the Cayman Islands courts should follow the House of Lords decision in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317.
Houldsworth
Before the court could consider whether Houldsworth should be followed it was necessary to determine the ratio in Houldsworth. His Lordship recognised that the authorities weren’t always clear or consistent in their understanding of Houldsworth.
The facts in Houldsworth, in brief, were these: Mr Houldsworth had been fraudulently induced to purchase shares in a bank. Once the bank went into liquidation, Mr Houldsworth sought to bring a claim for misrepresentation against the bank. The House of Lords was asked to determine whether Mr Houldsworth could rescind the share purchase contract or bring a claim for misrepresentation against the bank which was now in liquidation.
Doyle J embarked upon a thorough review of subsequent decisions of the English courts as well as those of other common law jurisdictions to discern how Houldsworth had been understood. In short, the decision in Houldsworth supported two key propositions:
i. Recission of contract was not possible when a company had gone into liquidation.
ii. Shareholders could not bring a claim for misrepresentation against a company in liquidation.
Several reasons were given for why shareholders could not bring a claim for misrepresentation against a company in liquidation. Principal amongst them appears to be that a shareholder cannot be both a shareholder in the company and creditor of all the shareholders.
The petitioners argued that company law has moved on significantly since 1880 when Houldsworth was decided. Houldsworth has been much criticised by courts in other common law jurisdictions as well as in academic writings, and importantly, the UK Parliament has since departed from Houldsworth through enactment of Section 111A of the Companies Act 1985.
Considering the extent of judicial consideration of this issue in other jurisdictions and the volume of academic writings on the topic, it was perhaps surprising that this was the first time a court in Cayman Islands was faced with deciding whether Houldsworth should still be followed.
Common law in Cayman Islands
Before determining whether the court should follow Houldsworth, Doyle J carried out an extensive analysis of the status of English court decisions in Cayman Islands, and concluded that:
“73…the reality will be in the vast majority of cases the Cayman Islands courts will follow English common law precedent but in some exceptional cases, especially where such precedent has been abandoned by the UK Parliament, it may decide to follow precedent from other leading common law courts such as the High Court of Australia. As we develop and mature as an independent jurisdiction we should have the confidence to break the umbilical cord from the English common law and develop our own common law to suit the best interests of the Cayman Islands. More and more we will be turning to local precedent.”
Held
Mr Justice Doyle accepted all of the submissions of the petitioners by holding that Houldsworth should not be followed in Cayman Islands for the following reasons:
- “it is arguably contrary to or adds an unjustifiable judicial restriction to the plain wording of a local statute (section 139 of the Companies Act);
- it has been abandoned by the UK Parliament, and has been heavily and persuasively criticised by others and not followed in the High Court of Australia and the Supreme Court in Bermuda at first instance;
- its reasoning is inconsistent with contemporary company law;
- it is an obsolete English common law decision which has ceased to be authoritative in England; and
- it is simply not persuasive in the present context.”
On the third issue, Doyle J accepted the petitioners position that misrepresentation claims fall outside section 49(g) of the Cayman Companies Act (2023 Revision).
Section 49(g) of the Cayman Companies Act (2023 Revision) on liability of present and past members of company provides:
“no sum due to any member of a company in that person’s character of a member by way of dividends, profits or otherwise, shall be deemed to be a debt of the company, payable to such member in a case of competition between the person and any other creditor not being a member of the company; but any such sum may be taken into account for the purposes of the final adjustment of the rights of the contributions amongst themselves.”
His Lordship held that damages from misrepresentation claims rank as unsecured debts of the company as they are based on misrepresentations before they became a member.
Comment
This case brings Cayman Islands law in line with English law and that of other common law jurisdictions such as Australia and makes it consistent with wider company law in Cayman Islands by protecting the rights of victims of misrepresentation after a company is in liquidation. It also demonstrates the confidence of the courts in Cayman Islands to develop their own common law consistent with local laws and unique interests.
