In the Cayman Islands Grand Court’s recent decision of Credit Suisse London Nominees Ltd v Floreat Principal Investment Management Limited, winding up petitions were presented against three Floreat entities. One of those entities, “LV2IM”, opposed the petition on the ground that it had a cross claim.

Notably, the cross claim in question was not against the petitioner itself (Credit Suisse, which held the shares as a nominee) but against an individual, Mr Wang, who was the beneficial owner of the shares. LV2IM argued that Mr Wang was in effect the “real party” to the proceedings and that the Court accordingly had a discretion either to stay or dismiss the petition.

Justice Kawaley held that although the petitioner had a prima facie right to seek a winding up order, the Court could in its discretion decline to grant such relief if it was satisfied that:

• the petitioner was subject to a cross claim asserted by one of the respondents and that the “identity and/or mutuality requirements” were met. This means that the petitioner in its capacity as (i) creditor and (ii) debtor in respect of the cross claim, must be one and the same;
• the cross claim was substantial (ie greater than the petition debt) and genuine in the sense that it had a realistic prospect of success; and
• it was reasonable to permit the respondent company to litigate the cross claim rather than be wound-up.

Justice Kawaley found that LV2IM failed the first limb of the test due to the absence of any authority supporting the propositions that:

• a cross claim against the ultimate beneficial owner of the shares held by the petitioning company could be relied upon to defeat a winding up petition; or
• the Court had a general discretion to ignore the identity of the parties requirement, as it saw fit.

LV2IM’s application also failed the second limb of the test as it had no realistic prospect of success as Justice Kawaley had already determined that Mr Wang is not liable for the petition debt (see our earlier blog here [https://www.harneys.com/our-blogs/offshore-litigation/principles-of-declaratory-relief-and-the-judgment-stay-jurisdiction/]). The cross claim was “the stuff that dreams made of” and “wholly detached from reality”.

The decision provides useful guidance as to the principles that apply in circumstances where there is a cross claim that may potentially be deployed in order to prevent or delay a winding up order from being made.

Separately, the decision is also helpful authority on the legal distinction between disputed debt cases (in which, assuming the debt is disputed on bona fide substantial grounds, the petitioner will lack standing to present or pursue a winding up petition) and cross claim cases (in which the creditor petitioner may have a prima facie right to a winding up order, but is subject to a cross claim which the respondent company ought to be permitted to litigate). In practical terms, in both cases, the outcome is similar: the respondent company will have demonstrated that it is inappropriate for a winding up order to be made.