It is common for Cayman Islands companies, particularly (but not exclusively) investment funds, to issue shares that are redeemable at the option of the shareholder. We are often asked to advise both shareholders and companies on the redemption process and their options in the event of dispute.
Check the articles
Our starting point will always be to check the company’s constitutional documents (primarily, the articles of association, but also any offering memorandum or shareholders agreement), which will set out the process which a shareholder must follow in order to redeem its shares.
The articles may also allow the company to suspend redemptions. If so, the process for so doing will be set out in the articles and it will be important for the company to ensure it follows that process exactly in order to achieve a valid suspension.
Solvency considerations
Even if a shareholder has followed the correct procedure to redeem its shares, the company will not be able to pay the redemption proceeds without breaching Cayman law if it will not remain able to pay its debts as they fall due once it has done so.
If there has been a valid redemption, but the company will not be able to pay its debts as they fall due after making the payment, the directors will have to either negotiate with the shareholder, or consider carefully whether to put the company into a formal insolvency or restructuring process.
What if the company doesn’t pay?
If the shareholder has followed the redemption process correctly and the company has not paid, the shareholder will typically have two options. Either it can issue a statutory demand, followed by a creditor’s winding-up petition if the debt remains unpaid, or it can start litigation to enforce its right to payment.
The articles of association and other constitutional documents may contain a clause prohibiting shareholders from petitioning for winding-up, an arbitration clause or an exclusive jurisdiction clause in favour of a foreign court. Such clauses may restrict a shareholder’s ability to bring action in the Cayman court.
Why does it matter? Liquidation priorities
Case law has held that once a shareholder has validly redeemed, it becomes a creditor and entitled to rank as such in the company’s liquidation, albeit its claims will be deferred to those of ordinary (non-shareholder) creditors. Shareholders in troubled Cayman Islands companies are usually advised to redeem as soon as possible, as those who have fully redeemed at the time liquidation is commenced will enjoy priority over those who have not.
At the time of writing, the order of priorities that will apply on liquidation is uncertain, at least where investments have been induced by misrepresentation, as both Doyle J (in 2023 in HQP Corporation) and Segal J (in 2024 in Direct Lending) have issued first instance judgments allowing shareholders to claim damages for misrepresentation against companies in liquidation, but their decisions are inconsistent as to where such claims will fall in the waterfall of priorities.
Every situation is different and taking specialist legal advice at an early stage will position shareholders as strongly as possible for their negotiations with the company. As stated above, it is important that shareholders redeem as early as possible to maximise the prospect of them ranking as a (subordinated) creditor if the company subsequently goes into liquidation. If you would like to discuss these issues, please contact Katie Pearson on katie@claritaslegal.com, Mark Burrows on mark@claritaslegal.com or Alexia Adda on alexia@claritaslegal.com.
