Taking a Closer Look at the Law Relating to the Appointment of Inspectors

This article first appeared in Volume 20, Issue 1 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing - www.chasecambria.com.

Barnaby Gowrie, Luke Petith, and Siobhan Sheridan, from the Insolvency and Dispute Resolution Group at Walkers, discuss the law relating to the appointment of inspectors.


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In the matter of Avivo Group (Cause No. FSD 145 of  2022 (RPJ)), Walkers, instructing Ms Clare Stanley KC of Wilberforce Chambers, acted as Cayman Islands counsel to Avivo Group (the ‘Company’) in respect of its successful opposition to Agricultural Development Fund’s (‘ADF’) motion for the appointment of inspectors pursuant to Section 64 of the Cayman Islands Companies Act (as amended) (the ‘Companies Act’).


By Notice of Originating Motion dated 1 July 2022, ADF (in its capacity as shareholder, holding approximately 20% of the issued shares of the Company) sought the appointment of inspectors to examine the affairs of the Company pursuant to Section 64 of the Companies Act (the ‘Motion’) on the grounds of certain purported concerns regarding the conduct, management and operation of the Company (for example, the role of the investment manager).

As at the date of the hearings in respect of the Motion, In the matter of Fortuna Development Corporation was the only reported Cayman Islands case law authority concerning Section 64 of the Companies Act: Henderson J stated that ‘the power to appoint inspectors is used rarely in the Cayman Islands’. In that case, inspectors (having been appointed in lieu of provisional liquidators) sought directions, amongst other things, regarding the scope of their investigation; the decision did not, therefore, address the grounds and circumstances in which the Grand Court of the Cayman Islands (the ‘Grand Court’) will be satisfied that it is appropriate to appoint inspectors pursuant to Section 64 of the Companies Act.


Parker J, accepting the submissions made by Leading Counsel to the Company, held that a number of ‘basic matters’ may be derived from a plain reading of Sections 64 to 68 of the Companies Act, as follows:

(i) the Grand Court (or the company by special resolution) has the statutory power to appoint inspectors to examine into the affairs of a company upon the application of the holders not less than 1/5th of the issued shares of a company;

(ii) following the inspectors’ examination, inspectors are required to prepare a report of their opinions to the Grand Court (not the applicant), and the ‘default rule’ is that the report shall not be open to public inspection; 

(iii) the inspectors’ report is admissible in legal proceedings as evidence of the ‘opinion’ of the inspectors in relation to the matters the subject of the report (Parker J referred to the English case of Gasco [1984] 1 WLR 271, in which Gibson J held that an inspectors’ report was not admissible as evidence of fact); and

(iv) the costs and expenses in respect of the inspectors’ examination and preparation of their report are to be paid by the applicant shareholder(s).

The ‘critical question’ before Parker J was the proper approach to the exercise of the Grand Court’s powers under Section 64 of the Companies Act. Given the paucity of Cayman Islands case law authorities, Leading Counsel for the Company undertook a detailed analysis of the approach adopted in respect of the appointment of inspectors in other jurisdictions (namely, England, New Zealand, Canada, South Africa, Hong Kong and Ireland); Parker J held that this exercise had been ‘useful in identifying the relevant principles’, there being ‘… no threshold criteria suggested as to the circumstances when the [Grand] Court might make an order, or as to the exercise of discretion for the [Grand] Court’s guidance. The matter has been left at large for the [Grand] Court to fashion the applicable principles’.

From the various authorities, Parker J derived the following non-exhaustive principles to be applicable, ‘where the threshold and discretion is at large’, to the exercise undertaken by the Grand Court when considering an application for the appointment of inspectors pursuant to Section 64 of the Companies Act:

(a) whether it is appropriate to appoint inspectors will depend upon the facts of the particular case: ‘the determination by the [Grand] Court as to whether the facts in a particular case are sufficiently serious to warrant such an order and whether the [Grand] Court should exercise its discretion to appoint inspectors is a particularly fact-sensitive issue, which will vary depending on the circumstances’;

(b) the appointment of inspectors is ‘a serious step’ and the Grand Court should ‘balance the competing interests of the parties and exercise its discretion in a principled way’. Parker J noted that the appointment of inspectors can have serious reputational implications on the company and the applicant will need to show they have a ‘good reason’ for requiring an investigation: per Denniston J, in the New Zealand case In re Mercantile Finance (1893) 12 NZLR 248: ‘Such extensive powers show that such an appointment is not to be made as of right to every dissentient minority, but only upon evidence of suspicion of grave misconduct or mismanagement’;

(c) the appointment of inspectors is ‘extraordinary’ and will be ‘warranted only when it is right and appropriate to do so’. Per Robson J in the Canadian Case Re Town Tropics [1911] MJ 9 No. 9, the power to appoint inspectors should be exercised ‘with caution, and only in cases clearly calling for its application’;

(d) although the appointment of inspectors is ‘not routinely made’ (this being reflected in the ‘paucity of reported cases from the common law jurisdictions’ and, at the time of the hearing of the Motion, there were no reported cases in the Cayman Islands2), it does not mean an order for the appointment of inspectors should not be made in an ‘appropriate case’;

(e) the appointment of inspectors will not be made ‘as of right’ upon the application of dissentient shareholders (see In re Mercantile Finance), nor is it appropriate for an examination to be ordered ‘merely to satisfy disgruntled shareholders that there is no legitimate cause for complaint’;

(f) it follows from the principles outlined at (a) to (e) above, that the Grand Court will not make an order for the appointment of inspectors, which would interfere with the internal management of a company without a ‘compelling reason to do so’;

(g) as to what is meant by compelling, Parker J held (by reference to the various authorities identified) that an order for the appointment of inspectors should only be made where there is ‘a strong likelihood, well founded on a solid and substantial basis, of serious misconduct and/or mismanagement, or concealment’ relating to the conduct, management and/or operation of the company. A mere ‘feeling’ that something is wrong or that there might be something that is dishonest or improper will not suffice;

(h) as to the applicable evidential standard, Parker J held that in a contested application, it was not enough for the Grand Court to be satisfied that ‘a prima facie case had arisen for investigation’, rather the Grand Court should only exercise its discretion to appoint inspectors when ‘undisputed facts’ were placed before it ‘pointing to the desirability of an enquiry by an inspector’: per Goldstone J in the South African case Sage Holdings v Unisec [1982] 1 WLD 337: ‘[t]he grounds which make it right or desirable to order an investigation should be undisputed or clearly established’;

(i) an ‘important consideration’ is whether the applicant has sought an explanation (of the issues the subject of the proposed inspection) from the directors of the company and such explanation has not been forthcoming and/or whether the directors have concealed facts from the shareholders;

(j) an order for the appointment of inspectors can be a useful and important tool where the company’s management have put themselves ‘beyond the reach of the shareholders’, but the power should not be exercised where there is a suspicion that a director or shareholder has been guilty of criminal conduct not clearly related to the affairs of the company, that is a matter for the police/prosecuting authorities;

(k) the power to appoint inspectors should only be exercised by the Grand Court ‘where some object is likely to be achieved’: per de Wit JP in the South African case Nafte v Allied Minerals Ltd 1966 (3) SA 94: ‘… In my opinion the court should only act if it is satisfied that some object is likely to be achieved eg the enquiry may lead to the winding up of the company … or when steps may be taken for recovery of damages or property by the company…’;

(l) the Grand Court must be satisfied that the application for the appointment of inspectors must be genuine (i.e. is not made for a collateral or improper purpose) and that the remedy of appointing inspectors is ‘appropriate and proportionate in all the circumstances’;

(m) the Grand Court should take into account the weight of shareholder support for the application, but this is ‘not a determinative factor’; and

(n) finally, the Grand Court should have regard, in the exercise of its discretion, to whether the applicant has other available remedies.

Parker J found that, by its evidence, ADF did not show that: (i) its purported concerns regarding the conduct, management and/or operation of the Company had been ignored; and/or (ii) that the Company had attempted to ‘conceal’ material matters from shareholders; and/or (iii) there had been a failure of governance at the Company which would warrant an order for the appointment of inspectors. Moreover, a number of alternative remedies were available to ADF (including the ability to bring direct claims against the Company).

Rather, Parker J found that the Board of Directors of the Company (the ‘Board’) was comprised of a number of experienced directors, with access to good professional advice and the Company had been ‘forthcoming’ in responding to all of ADF’s purported concerns. ADF had at all material times had a director on the Board who had been provided with all materials; and the Company had taken a ‘reasonably constructive approach with regards to attempts to resolve’ the matter (i.e. in proposing alternative methods to resolve the issue without the need to seek recourse under Section 64 of the Companies Act).

Parker J also indicated that ADF had failed to identify ‘sufficiently clear[ly]’ the objective which would be achieved by the appointment of inspectors: ‘a report from the inspectors to the [Grand] Court would no doubt provide extensive information, but it would be a matter for the [Grand] Court (and possibly regulators and the Company itself) to decide what to do with in the first instance’. In circumstances where ADF’s ‘central concern is the governance of the Company and the constitutional arrangements within the Company’ which ‘have been in place for many years’ and ADF has (through its representative on the Board) ‘the ability to find out what has been going on’, an order for the appointment of inspectors ‘which might lead to or even force a renegotiation of these commercial arrangements is not an appropriate exercise of the [Grand] Court’s power’.

In respect of the Company, applying the above principles, Parker J held that the grounds giving rise to the appointment of inspectors had not been established on the evidence: ‘[ADF] has not shown, to the requisite standard, serious misconduct and/or mismanagement or concealment’ and absent any public interest, declined to make an order for the appointment of inspectors in respect of the Company.


Parker J’s decision is instructive: being the first Cayman Islands decision to substantively address the principles to be applied by the Grand Court in considering whether, in the exercise of its discretion, it is appropriate to appoint inspectors pursuant to an application under Section 64 of the Companies Act.


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