Cayman Inspectorship Under the Microscope

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").

On 16 December 2022, the Honourable Justice Parker handed down his decision, which, given the paucity of Cayman Islands case law authorities regarding the exercise of Section 64 of the Companies Act, provides useful guidance on the principles to be applied by the Grand Court of the Cayman Islands (the "Cayman Court") in determining whether it is appropriate to make an order for the appointment of inspectors for the purposes of examining the affairs of a company.

In summary, Parker J derived the following non-exhaustive principles to be applicable to the exercise to be undertaken by the Cayman Court when considering an application for the appointment of inspectors pursuant to Section 64 of the Companies Act:

  1. the appointment of inspectors will not be made "as of right" upon the application of a 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";

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

  3. the appointment of inspectors is "a serious step" and the Cayman 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;

  4. an order for the appointment of inspectors (on a contested basis) 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 based on "undisputed facts". A mere “feeling” that something is wrong or that there might be something that is dishonest or improper will not suffice; and

  5. relevant considerations will include 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 the directors have concealed facts from the shareholders;
  • the application is being pursued for a genuine reason (i.e. not for a collateral or improper purpose);
  • some useful object will be achieved by the appointment of inspectors; and
  • the applicant has some other available remedy.
A fuller analysis of the scope and application of Section 64 of the Companies Act and Parker J's instructive judgment will be forthcoming.

Related Content