| In an important decision handed down on 7 November 2025, the Cayman Islands Court of Appeal addressed the application of the principle in Houldsworth v City of Glasgow Bank (1880) 5 App Cas, which is a rule that precludes the making of a claim by a shareholder of a company, after the presentation of a winding up petition against the company, for damages for misrepresentation inducing a subscription for shares in the company. That principle, which the Court of Appeal held was a facet of the principle of maintenance of capital, was abrogated in the UK by legislation in 1989. However, the Court of Appeal in re HQP concluded that it survived as part of the common law of the Cayman Islands, but limited only to situations where there are insufficient assets to pay off all the external creditors. The Court of Appeal justified and explained the limitation to the width of the common law principle by reference to well-known authorities which set out when common law courts might decline to follow a decision of an English (or UK) appellate court, including where there are “local reasons” for not following such decisions. Interesting, in re HQP, it was held that “the large number of open ended investment funds incorporated in the Cayman Islands in which investors purchase their investment by subscribing for redeemable shares and where, in a liquidation, it is to be expected that the total debts owed by the company to external creditors will be much smaller than the total of the claims made by shareholders who had served dishonoured pre-liquidation redemption notices, is a very good reason for limiting the application of the Houldsworth rule to situations where there are insufficient assets to pay the external creditors or otherwise to see that they are provided for.” As a result of this decision, if there are assets left once the external creditors have had all their debts fully paid out, a shareholder who has a damages claim for misrepresentation which induced it to buy shares in the company can prove for such a claim in the liquidation, albeit its claim the falls to be treated as made for a sum due to the claimant in its capacity as a member. The Court of Appeal’s judgment was delivered after hearing two conjoined appeals in re HQP Corporation itself and in the case of Direct Lending Income Feeder Fund, after the first instance judges in those cases (Doyle and Segal JJ) had delivered irreconcilable judgments in July 2023 and March 2024 respectively. In summary, the Court of Appeal agreed with the decision of Segal J and disagreed with that of Doyle J. |
To read the full judgment, please click here.
Steven Thompson KC (instructed by Conyers Dill & Pearman LLP in Cayman, and Joseph Hage Aaronson & Bremen in London) acted in the case for the appellants in re HQP Corporation (having taken the case over from the late Alan Steinfeld KC).
Hugh Miall assisted Campbells LLP in Cayman who acted for the respondents in re HQP Corporation.
