Contingent Creditors’ Winding Up Petitions: Lessons from In re AuBit International     

Nov 7, 2023

On 19 October 2023, Doyle J delivered his reasons in In re AuBit International (FSD 271 of 2023), ordering the company to be wound up. The judgment gives rise to a number of interesting legal and practical points regarding the position of petitioning creditors with contingent debts and the use of the restructuring officer regime under Part V of the Companies Act.

Mark A. Russell and Rupert Wheeler successfully represented a group of unsecured creditors supporting the Company in resisting an application for joint provisional liquidators, and subsequently at the hearing of the winding up petition.

Background

The Company, AuBit International, was a digital asset manager which held significant assets within brokerage accounts at a Greek investment platform called Ardu Prime Investments SA (Ardu Prime). The Company claimed to have suffered severe losses due to the refusal of Ardu Prime to release any of the approximately US$60.4 million in fiat currencies and crypto currencies held in those brokerage accounts.

Following Ardu Prime’s refusal, the Company had presented a petition for the appointment of restructuring officers pursuant to Part V of the Companies Act. Through that petition, the Company submitted that it was unable to pay its debts and thus insolvent. It also submitted that there was a “compelling need” for independent restructuring officers to undertake forensic investigations into the Company’s brokerage accounts at Ardu Prime, due to concerns of fraud by Ardu Prime. Doyle J dismissed the restructuring officer petition on 6 September 2023 (see In re AuBit International (FSD No. 240 of 2023 (DDJ), 4October 2023).

On 11September 2023, three co-petitioners presented a winding up petition against the Company. The petitioners were retail investors who claimed to be contingent creditors of the Company based on extant proceedings in the United States. The petitioners applied for the Company to be wound up based on, among other things, the Company’s own previous admissions that it was unable to pay its debts and that there was an urgent need for an independent investigation.

Following a one-day hearing, Doyle J wound up the Company on the basis of its inability to pay its debts and on the just and equitable ground of needing a full investigation.

The judgment addresses notable legal questions including (a) whether a petitioner can claim standing based on a pending claim for unliquidated tortious or equitable damages and (b) whether a disputed contingent claim should be dismissed as an abuse of process and/or pursuant to the general rule of practice that a winding up petition based on a debt disputed in good faith and on substantial grounds should be dismissed or stayed. It also gives rise to some important practical points.

Standing based on unliquidated claim for tortious or equitable damages

The petitioners based their standing on the fact that two of them had issued a claim against the Company in state court in Wyoming, alleging various causes of action in tort and equity and seeking both compensatory and punitive damages, and that the third petitioner had similar causes of action that had yet to be issued in any court. The Wyoming litigation was in its early stages and was yet to be determined by the court. The Company submitted that this was inadequate to found standing.

Holding that at least two of the three petitioners had standing, Doyle J confirmed that a contingent claim may include a claim for unliquidated damages for a tort and in equity (at [26]-[27]). This followed the reasoning of Kawaley J in In re Atom Holdings (FSD 54 of 2023 (IKJ), 18 May 2023), where it was held that non-contractual claims can found standing as a contingent creditor.

These rulings confirm the very broad scope of standing for contingent creditors in Cayman Islands winding up proceedings. Only in the most tenuous of cases is standing of contingent creditors likely to be denied (see for example, In re Shinsun Holdings (Group) Co Ltd (FSD 192 of 2022 (DDJ), 21 April 2023) where there was “no obligation whether existing or otherwise upon the company to the petitioner whether in contract, tort, equity or otherwise” (at [27])).

Contingent disputed debts and the rule in Parmalat

In consequence of the nature of the petitioners’ contingent debt, a further issue arose as to whether the rule of practice described in Parmalat Capital Finance Limited v Food Holdings Limited, 2008 CILR 202 (PC) should apply. That rule states that “if a petitioner’s debt is bona fide disputed on substantial grounds, the normal practice is for the court to dismiss the petition and leave the creditor first to establish his claim in an action” (at [9]).

The Company indicated that it intended to dispute the claims in the Wyoming proceedings and that those claims were yet to be determined. On that basis, it was argued that the Grand Court should apply the rule in Parmalat and dismiss the petition pending the outcome of the Wyoming proceedings.

Doyle J declined to apply the rule in Parmalat, stating that “a rule of practice should not be elevated to a rule of law” (at [29]). In doing so, he had regard to his finding that the first two petitioners “have at the very least arguable prima facie claims against the Company”, such that it was not an abuse to allow the winding up petition to proceed.

Though plainly based on its own facts, this aspect of the ruling implies that a contingent creditor would need to at least establish that its underlying claim was “arguable” in order to avoid the striking out of its petition as an abuse and dismissal pursuant to Parmalat. While he did not expressly hold that the rule of practice could apply to a contingent debt based on a disputed cause of action, Doyle J did refer to Australian authorities that were cited to him to that effect. While winding up petitions based on these kinds of contingent debts are relatively rare, this is an area that could result in more litigation.

Practicalities

In addition to legal principles, the case also provides some important reminders for preparing and litigating a winding up petition.

First, ensure that full due diligence has been conducted regarding the parties, and that they are named and constituted correctly. Shortly before the hearing of the petition, it was discovered that one of the petitioners had been incorrectly named and that another had been struck off and dissolved. The Company sought to strike out the petition on this basis. The petitioners promptly sought amendment to reflect the correct name of the first petitioner and restored the third petitioner. Doyle J described this as “most unsatisfactory”, but nevertheless exercised his discretion to allow amendment to cure these defects under GCR O.20, r.5 and CWR O.1, r.5, based on the explanations and prompt remedial action by the petitioners. However, in doing so, he awarded indemnity costs in the Company’s favour. This could have been avoided had the appropriate checks been made.

Second, be aware that an application to appoint restructuring officers could backfire if unsuccessful and give creditors grounds for seeking winding up. The Company was placed in the unenviable position of having to persuade the Court that it was able to pay its debts and no longer in need of an investigation, despite having submitted the contrary in its restructuring officer petition the month before. Doyle J described this position to be “as unattractive as it is unpersuasive” (at [30]).

Third, when resisting a winding-up petition, ensure that the financial evidence is in the best possible state that it can be. Though this may be easier said than done, the Court is likely to draw an adverse inference where detail is lacking.

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