Where a company, including a Hedge Fund, is financially distressed or otherwise not in a position to continue its business there exists the option to wind up/liquidate the company.
In the Cayman Islands a company's business can be brought to an end (i.e. wound up or liquidated, which is the equivalent of the bankruptcy process in the USA) voluntarily by votes of shareholders with voting rights, if solvent or compulsorily by the Court, if the company is insolvent or if it is just and equitable for the company's business operations to cease. There is no strict definition of what is "just and equitable" but there are a number of grounds for such an application established by past cases e.g. fraud, loss of faith in management, failure of substratum/purpose.
When a company is wound up a liquidator or liquidators are appointed to assist the Court with that process and the directors of the company cease to have any powers in regard to running the business of the company. The liquidators main task is to gather the assets of the company and use them to pay, first, the expenses of the liquidation then, second, the creditors and, if there is any surplus after those payments, then, lastly, the shareholders. Once this is done the company is dissolved.
To have the Court consider winding up a company the process involves issuing a Petition seeking an order winding-up the company. The Court will make directions about who should receive the Petition, a timetable for any defences or objections to be raised and fix a hearing, which, on average, is 8-10 weeks from the date the action commenced. The Court charges a fee of US$6,097.66 (CI$5,000.00) for the application to wind up a company which usually covers all document filing fees and hearing fees. If the Court makes an order to wind-up the company the costs incurred will be paid out of the assets of the company.
If it can be shown that there is any danger of dissipation of assets of the company between the issue of the court action and the hearing of the application to wind-up then it is possible to apply to have management deprived of their powers pending the hearing of the application to wind-up. Strong evidence is needed to succeed in such an application.
It is possible when applying to wind-up a company to ask the Court to grant alternative remedies which can include Orders regulating the company's affairs, making the company do something or stop doing something, authorising litigation against the company by the petitioner and requiring a purchase of shares. The Court must be satisfied that it could make a winding-up order but that an alternative remedy is more suitable.
A petition will specifically state which liquidator the petitioner is putting forward and, provided the proposed liquidator is compliant with the local requirements as to independence and experience, it is very unlikely that the Cayman Court will substitute a different liquidator in place of the one put forward in the petition.
A liquidator has a duty to gather in all the assets of the company which can involve a duty to investigate the causes of failure of the company. If the liquidator determines during the course of that investigation that any party has caused loss to the company he has the power to bring an action on behalf of the company against the person causing the loss to recover any losses suffered by the company. However, prior to issuing proceedings, the liquidators are required to consider whether such litigation would be in the interests of the winding up of the company. As a part of this decision the liquidators will necessarily need to undertake a cost/benefit analysis and invariably the liquidators will seek the views of those with the economic interest in the liquidation before issuing any litigation.
Upon the commencement of the liquidation the liquidator is required to set up a liquidation committee made up of between 3 and 5 investors of those persons or entities with the economic interest in the liquidation who will represent the views of all investors. Investors are elected to the liquidation committee by way of a vote of all investors at a meeting which must be called by the liquidator within 1 month of the commencement of the liquidation. Although the liquidation committee only has an advisory role and has no direct power over the liquidator, it is a rare case that the liquidator will ignore the views of the liquidation committee. The liquidation committee also has the right to go to the Cayman Court if it is unhappy with any action (or inaction) of the liquidator and have the Court order the liquidator to act (or not act) in a certain way.