Business as Usual for Creditors Winding Up Petitions in the Cayman Islands

The Cayman Islands Grand Court (the “Court”) has consistently taken the position in recent years that where: (i) a winding up petition has been presented by a creditor; (ii) the debt on which the petition is based is alleged to be disputed; and (iii) the agreement under which the debt is said to arise provides for disputes to be arbitrated, that the Court will first need to be satisfied as to the existence of a bona fide dispute on substantial grounds prior to being able to exercise its discretion to stay or dismiss the winding up proceedings in favour of arbitration.

In the Matter of BPGIC Holdings Limited, the Chief Justice held that the decision of the Privy Council from September 2023 in FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation (“FamilyMart”) (where it was held that a minority shareholder’s complaints must be arbitrated pursuant to the terms of a shareholders’ agreement and stayed a just and equitable winding up petition) did not change the Court’s approach to creditor winding up petitions.

Notably, FamilyMart did not consider the interplay between a valid and binding agreement to arbitrate an underlying dispute and creditor winding up petitions. However, given the pro-arbitration position taken by the Privy Council in FamilyMart, some suggested that FamilyMart could result in a change of approach by the Court, with the Court being required to refer the determination of the disputed debt to arbitration, without first being able to determine, as a threshold matter, whether there was a bona fide dispute on substantial grounds.  The Court has shown itself adept at separating bona fide and substantive disputes from those, when the lid is lifted, that are not (see for example, Re Duet Real Estate Partners 1 LP and Re Grand State Investments Limited).

The Court has further reinforced this theme. Where there is a contractual agreement to arbitrate a dispute in respect of the underlying debt, the Court will only stay or dismiss a creditor’s winding up petition in favour of arbitration if it finds that there is a genuine dispute of substance.

While the Court acknowledged its decision may appear to be inconsistent with the internationalism endorsed by the Privy Council in FamilyMart, it went on to make clear that the decision is consistent with Cayman Islands law with respect to stays in favour of foreign arbitration¹ and with the long-standing approach of the Court on applications to stay or dismiss creditor winding up petitions on the ground that the debt is disputed.

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¹Highlighting, that section 4 of the Cayman Islands’ Foreign Arbitral Awards Enforcement Act provides that, among other considerations, the Court must stay a proceeding where an arbitration agreement applies unless the court is satisfied “there is not, in fact, any dispute between the parties with regard to the matter agreed to be referred”. This provision is not included in the equivalent English legislation where the Courts have previously taken the approach that, where there is a valid and binding arbitration agreement, the Court should not investigate, save in whole exceptional circumstances, whether the debt is bona fide disputed on substantial grounds before referring the dispute to arbitration.