Cayman Islands Grand Court clarifies grounds for validation orders following presentation of a winding up petition

The Grand Court of the Cayman Islands has provided further clarification on instances in which specific and general validation orders may be granted to enable a company to continue to trade following presentation of a winding up petition.

On 20 March 2025 the Grand Court of the Cayman Islands handed down its decision in Allfunds Bank S.A. v Rasmala Trade Finance Fund [2025] CIGC (FSD) 22 (Allfunds v Rasmala).

This decision has clarified when both specific and general validation orders may be granted by the court during the twilight period between the presentation of a winding up petition and its determination. It also provides welcome guidance to companies and stakeholders as to the types of transactions and business dealings which may be validated by the court pending determination of a winding up petition.

The Court has previously provided much needed clarification of the test for validating certain transactions by companies that are subject to a winding up petition. Read more about this previous clarification on our website.

Background to the application

In the case, the petitioner Allfunds Bank S.A. (Allfunds), who is a contributory of Rasmala Trade Finance Fund (the Fund), sought the appointment of liquidators and the winding up of the Fund in accordance with section 92(e) of the Companies Act (2023 revision) (the Companies Act) on just and equitable grounds. The winding up petition was filed on 25 September 2024.

The period from the presentation of a winding up petition to its determination is known as "the twilight period". If a winding up order is made, the winding up is deemed to have commenced on the date when the petition was presented. This means that any disposition of company property, transfer of shares or alteration in the status of a company's shareholders during the twilight period is deemed void and may be set aside on the application of the liquidator.

In this case, the Fund had been continuing to operate in its ordinary course of business by making payments of dividends and redemptions (together with the associated costs of operating). It also intended to roll over some of its financing due to mature over the coming months and explore potential bridge financing of a real estate asset in the UAE. The Fund filed a summons on 17 December 2024 seeking orders in accordance with section 99 of the Companies Act either:

• validating all transactions entered into or to be entered into in the ordinary course of the Fund's business from presentation of the winding up petition to its determination (the General Validation Order)
• validation of certain specific types of transaction (the Specific Validation Orders)

The purpose of validation orders under section 99 of the Companies Act

In relation to the test for validation under section 99 of the Companies Act, the Honourable Justice Jalil Asif KC (Asif J) referred to the principles considered by the Court of Appeal in Tianrui (International) Holdings Company Ltd v China Shanshui Cement Group Ltd [2020] 1 CILR 417 and to the analysis of that judgment in Tianrui (International) Holdings Company Ltd v China Shanshui Cement Group Ltd) (unreported, 31 March 2023) (Tianrui).

In particular, Asif J:

• reaffirmed that the purpose of section 99 of the Companies Act is to preserve the status quo of the relevant company during the twilight period for the benefit of stakeholders in the possible liquidation. Any subsequently appointed liquidator would have the power to unwind transactions that have taken place during the twilight period and return the assets and circumstances of the company and its contributories to those which were in place at the time the winding up commenced. Companies may seek validation orders from the court to avoid such transactions being questioned by the future liquidators. However, the court would only grant a validation order if it were satisfied that it would preserve the status quo pending determination of the petition, so as to not undermine the essential purpose of section 99
• clarified that during the twilight period, a company may still enter into appropriate transactions to carry out its normal business, without obtaining validation orders, and often a liquidator will adopt transactions that are bona fide and not prejudicial to the company and the parties interested in the liquidation
• asserted that there is no difference in the principles to be applied where a validation order is sought retrospectively or prospectively. The evidence presented in support of a retrospective validation order should, in theory, address the impact of the transaction on the status quo more effectively
• explained that, in the context of a winding up petition presented on the just and equitable basis grounded on concerns about issues such as management, loss of substratum or oppressive conduct, where solvency is not in dispute, a validation order will have the effect of excluding the transactions in question from the scope of any investigation into the company and its affairs, and insulating them from potential avoidance by a liquidator

Asif J further added to the guidance in Tianrui that in the absence of sufficient evidence to justify a validation order at the time the application for validation is made, it might be prudent for the court to delay its decision until the petition has been heard. This is especially the case when the petition hearing is imminent, as in Allfunds v Rasmala.

The validation orders granted

The General Validation Order

The court in this case set out several factors which were considered in its determination as to whether a general validation order is justified in the circumstances:

• the scope of the general validation order sought; if the scope is very wide, granting a general validation order will risk adversely impacting the status quo rather than preserving it as it would take away the liquidator's ability to challenge any transactions made in the twilight period
• the application is made as soon as the winding up petition has been presented, or otherwise the application is expedited on grounds of urgency
• the evidence should therefore show:
  • that the company is not able to operate satisfactorily and cannot trade in the ordinary course of its business, and that there is a real risk of paralysis arising from the winding up petition
  • that there will be no adverse impact on the status quo of making a general validation order
  • if applicable, that counterparties are complaining that there is a lack of commercial certainty in their dealings with the company
• whether the petition is due to be heard imminently, meaning that the period over which the company's transactions might be subject to avoidance is of limited duration

In this case, Asif J did not grant the General Validation Order on the basis that:

• the petition was due to be heard in two and a half months' time
• the Fund had been able to trade in the ordinary course of its business
• the validation application was not expedited on the basis of urgency
• the Fund otherwise failed to persuade the court that the General Validation Order would preserve the status quo

The Specific Validation Orders

On the question of whether specific validation orders are appropriate, Asif J once again considered the evidential burden faced by companies when making such an application. In particular, the level of specific evidence submitted to identify, explain and justify the transaction for which a specific validation order is required is paramount, especially when the transaction in question is not necessarily part of the day-to-day management of the company's affairs. In the case of transactions involving counterparties, the court will also consider whether the counterparties have been put on notice of the company's position and, if so, what their reaction is in relation to such a notification.

In this case, Asif J granted validation orders in respect of specific transactions which he considered to be part and parcel of the Fund's existence. These included existing financings and investments, cash management, payment of dividends, payment of other professional fees and operating expenses and payments to permit redemptions by the Fund's members.

However, Asif J did not grant a validation order in respect of:

• payment of management fees due under an investment management agreement, on the basis that these payments were not chased by the investment manager and a future liquidator may want to investigate such transactions and request supporting evidence from the investment manager
• the proposed bridge financing of the real estate asset in the UAE, given the lack of evidence in relation to the proposed transaction which did not enable the court to determine whether the status quo was likely to be preserved

Implications for companies facing winding up petitions seeking validation orders

Companies contemplating trading during the period following the presentation of a winding up period should carefully consider whether it would be appropriate to seek general or specific validation orders to avoid relevant transactions being set aside in the event a winding up order is made.

It is essential that the company present comprehensive and detailed evidence to the court to support the validation orders being sought. The court will exercise a delicate balancing exercise when evaluating applications for validation orders to ensure they do not infringe upon the essential purpose of section 99 of the Companies Act, which is to preserve the status quo.

How Ogier can help

Ogier has one of the largest Dispute Resolution teams in the Cayman Islands advising on technical, strategic and procedural aspects across the spectrum of contentious commercial issues and disputes. For more information on this topic or to find out how the firm can advise you in this area, contact your usual Ogier contact or one of the authors of this article.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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